While this indicates the average exposure of the fund industry, the sharp jump in funds exposure to these stocks is more visible in scheme-wise holdings. For instance, UTI Master Value has raised its mid-cap holding from 45% in April 2004 to 57% in August. Its exposure to small-cap stocks has increased from 16.8% to 20% during the period. The fund has reduced its exposure to large-cap stocks from almost 38% to 23.7%.
Alliance Buy India, Tata Pure Equity, Principal Resurgent India Equity, Prudential ICICI Growth and Kotak MNC are among others that have significantly raised exposure to such stocks, data available with fund tracker Value Research shows.
Relative value of mid-cap stocks in comparison with large-cap stocks has been the major driver of investment, according to fund managers.
Says HSBC Mutual Funds chief executive Sanjay Prakash: Funds have been hiking investment in mid-cap stocks for the last three months or so. We have been investing based on their relative value.
Over the past six months, there has been significant investment in mid- cap as well as small-cap stocks. These are value picks. In the last year, these stocks have delivered good returns, says Sundaram Mutuals MD TP Raman.
The difference in valuation of mid-cap and large-cap stocks, however, is narrowing down. Agrees Prakash: Currently, these stocks appear overvalued compared to large-caps. One should now look at large-cap stocks. The Finance Bill has been approved, but people are still waiting for turnover tax to be implemented. This should also see some correction and reallocation happenning in mid-cap stocks in the short-term.
The funds sharp rise in mid-cap and small-cap stocks has given rise to concerns about a change in the risk profile of schemes as these stocks are more volatile. It all depends on the objective of each fund. I agree that one should not take undue exposure to such stocks, avers Prakash. Besides active management, investments in these stocks should be based on liquidity and earning potential, adds Raman.