HDFC Mid-Cap Opportunities Fund Growth INF179K01CR2

Therefore, fundamental research forms the crux of his investment approach. He emphasizes understanding the niceties of a business before investing in it. He tries to identify companies with robust business models, strong competitive advantages, and clean balance sheets. Company meetings are also an integral part of the evaluation process.

The manager looks for tangible business models with a track record. Emerging/niche companies that have untested business models, or are at best simply attractive ideas, do not find favor with him. He typically looks for firms that can generate reasonable free cash flow and have high return on equity. He combines absolute and relative valuation parameters to select stocks that are not too expensive relative to their growth prospects. Broadly speaking, the investment style can be characterized as growth-at-a-reasonable-price.

Setalvad adheres to a "true to the label" approach when making investments, resulting in a portfolio with a lower weighted average market cap relative to the category average. This can affect the portfolio's liquidity compared with peers.

At its core, the process is reasonably simple and well-defined. For it to succeed, getting the research right is primary. Setalvad is proficient on that front and has adequate support from the investment team. The execution has been proficient so far.

However, the portfolio liquidity profile has deteriorated over time and that is a concern given its large size. While the portfolio’s characteristics and fundamental attributes remain intact, we adopt a cautious stance as we evaluate its impact on the execution going ahead. Hence, we have downgraded the Process Pillar to Average from Above Average.

The portfolio construction and stock selection are largely bottom-up with not much heed paid to the top-down factors. Chirag Setalvad is benchmark-agnostic when constructing the portfolio and can go against the grain based on where he finds ideas that fit his selection criteria. This has resulted in a portfolio that often differs significantly from the benchmark index and category norm.

He constructs a reasonably diversified portfolio with meaningful representation in his high-conviction bets but without going overboard in them. It consists of around 65-80 stocks, with the top 10 holdings constituting around 30%-35% of the portfolio. From a liquidity management perspective, the strategy has few guardrails in place in terms of exposure per company, which is around 5% for mid-cap stocks and 3% for small-cap stocks.

The portfolio tends to have a higher allocation to mid- and small-cap stocks compared with peers. While the mid-cap exposure usually hovers in the range of 65%-70%, small caps account for 15%-25%.

Setalvad is a patient investor plying a long-term buy-and-hold approach. He doesn’t believe in selling businesses in a hurry if they tend to be laggards in the portfolio unless something has fundamentally changed. The portfolio construction aligns with the investment approach with which Setalvad has traditionally managed the fund. Overall, the strategy has been consistently applied and executed well.