4 good mid- and small-cap funds

By Morningstar Analysts |  26-12-16 | 

This year, our fund analysts assigned four 'Silver' ratings to funds that fall in the Equity Small/Mid Cap category. Here are their views on the four funds.


Although portfolio manager Vinit Sambre co-managed this fund since July 2012, he took its independent charge in July 2015 after Apoorva Shah relinquished its management responsibility and moved to the fund house’s offshore division.

Sambre is a competent analyst and also the dedicated small/mid-cap specialist with the fund house. He has reasonable portfolio management experience under his belt, too.

The fund’s strategy allows Sambre to play to his strength, which makes him an apt replacement for Shah. He is backed by a high-calibre team, and this adds to our conviction.

While the fund’s broader investment strategy remains intact, Sambre has a different investment style compared with Shah. For instance, factors such as market sentiment, news flow, and momentum formed the crux of Shah’s investment approach, which often led to above-average turnover in the fund. Sambre, on the other hand, plies his signature style here of buying into growth-oriented quality stocks and staying invested for the long haul. This we believe will result in the fund’s turnover ratio coming down going ahead.

Sambre focusses on long-term strength of the company, which reduces the issue-specific risks associated with small/mid-cap funds. His relatively pure take on small/mid-caps versus the category norm is a positive, in our opinion. Expectedly, while the fund is likely to gain more than a typical peer in up markets, it also runs the risk of faring worse in down markets. Also, over shorter time frames, it can witness bouts of intense volatility and significant underperformance.

Sambre is a capable manager and his experience in running similar strategies is noteworthy. He appears at home with his investing style and has been fairly disciplined in his approach. Under him, the fund has the wherewithal to outperform its benchmark index and category peers over the long term.

  • Fund Manager: Vinit Sambre
  • Investment Style: Mid Growth
  • Investment Process: Sambre selects companies with sustainable competitive advantages and dominant market shares. He combines growth-styled quality stocks with value plays when constructing the portfolio.
  • Expense Ratio: 2.41%
  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Performance: Though its 3-, 5- and 10-year performance is in line with the category average (or marginally higher), the outperformance is seen in the recent past. In fact, in 2015 it underperformed the category average. However, this year the YTD is a significant lead over the category average.


Krishnakumar is a competent fund manager with experience in small- and mid-cap research.

He took over the reins of this fund after former fund manager Satish Ramnathan’s exit in December 2012. We believe that Krishnakumar is a proficient manager in the small- and mid-cap space. His invests in fundamentally sound stocks with positive growth prospects, good pricing power, and stable cash flows. Krishnakumar is valuation-conscious while investing in stocks but is willing to stay invested in companies with higher valuations if longer-term growth prospects appear favourable.

The investment style is essentially bottom-up with a buy-and-hold philosophy on high-conviction names. Krishnakumar’s in-depth understanding of companies and background in researching small- and mid-cap stocks is an advantage. He typically seeks to invest in quality companies with differentiated businesses. An eight-member analyst team and a macroeconomist support the equity investment team.

Though Krishnakumar’s track record on this fund is relatively short, we have confidence in the way that he has been managing Sundaram S.M.I.L.E (a small- and mid-cap-oriented fund) since 2006.

The strategy has its fair share of risks. The fund has a larger exposure to small- and mid-cap stocks than its category peers. This can result in an underperformance of the fund in a rally led by large-cap stocks.

In addition, the long-term orientation can mean the fund can diverge from the competition and index over shorter periods. However, the investment process can deliver pleasing results for risk-tolerant investors who can ride out short-term volatility.

  • Fund Manager: Krishnakumar
  • Investment Style: Mid Blend
  • Investment Process: The portfolio is built based on high-conviction ideas and can tend to be sector-heavy. A well-defined process is followed, aimed at constructing a growth-oriented long-term portfolio of stocks.
  • Expense Ratio: 2.42%
  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Performance: A decade ago (2006), this fund topped the performance chart. In 2014, it underperformed the average. Last year’s return and its YTD are ahead of the category average. Despite these bumps, over the long term, it has been a good performer.

The challenges in managing a mid-cap fund are abundant. While unpredictability in the equity markets is accentuated in this segment, factors such as constrained liquidity, limited coverage, and poor disclosures make mid-cap investing a tricky proposition. The need for a skilled manager and a solid investment process cannot be overstated. ICICI Prudential Midcap Fund makes the grade on both counts.

Mrinal Singh is a competent portfolio manager who has been in the job since May 2011. He has had extensive experience as an analyst in the small/mid-cap space. Intensive research forms the core of his investment approach. He fluidly combines top-down and bottom-up approaches to identify companies in which to invest. Though the strategy can be termed broadly as growth-at-a-reasonable-price, Singh invests a small portion of the portfolio in value stocks as well. Expectedly, Singh has executed the strategy with a reasonably good degree of success.

The strategy has some inherent risks. Given the fund dwells in mid-cap territory, liquidity risk during testing times is inherent to the strategy. On a positive note, the manager is cognizant of this and maintains a daily liquidity of 15% in the portfolio. Additionally, Singh’s quality bias and valuation consciousness can hold back the fund in market phases when speculative fare is in favour.

The fund has been going through trying times for some time now. From January 2015 to July 2016, it clocked a return of 7%, underperforming its benchmark (11%) and 91% of its India small/mid-cap Morningstar Category peers.

We draw conviction from Singh’s experience, research-driven approach, and executional capabilities. With small/mid-cap his forte and value investing his speciality, Singh is playing to his strengths here. 

  • Fund Manager: Mrinal Singh
  • Investment Style: Mid Blend
  • Investment Process: Mrinal Singh buys reasonably priced growth stocks and stays invested for the long haul. He combines absolute and relative valuation to scout for reasonably priced growth stocks.
  • Expense Ratio: 2.5%
  • Star Rating: 3 stars
  • Analyst Rating: Silver
  • Performance: Last year the fund underperformed the average. Its YTD has followed suit. But it’s 3- and 5-year returns are above the category average.


The fund is a good investment option for risk-taking investors.

The small/micro-cap segment of the Indian equity universe is a risky space in which to invest. Hence, research experience and good execution are of paramount importance for portfolio managers in this area. Vinit Sambre fills the bill on these counts. He is a competent analyst with reasonable portfolio management experience under his belt. He has managed this fund since June 2010. That he is backed by a high-calibre team also adds to our conviction.

Sambre plies a bottom-up, buy-and-hold approach to picking stocks, scouting for growth-oriented companies that have sustainable competitive advantages over their peers and are leaders in their industries. Although he is valuation-conscious, he believes that the companies in which he invests should command a premium given their leadership positions in their respective industries. We believe this focus on longer-term strength is a positive and helps reduce the issue-specific risks associated with a small-cap fund. Sambre also invests a portion of the portfolio in value stocks. We believe that this approach can help reduce price risk in the portfolio, given the inherent growth bias here. Cash calls are not a part of the strategy--this is a positive as it eliminates timing risk.

That said, small/micro-caps are tricky beasts and the risks of running such funds are magnified. For instance, Sambre may find it difficult to exit stocks when liquidity dries up--a common event in the small- and micro-cap space. Moreover, the fund’s exposure to value stocks may lead to potential value traps. A growing asset size can pose challenges in the form of market-impact cost and opportunity cost. But on a positive note, the fund house has restricted the subscription amount to Rs 0.1 million per subscription. Nonetheless, Sambre so far has displayed an ability to contain downside risks in the portfolio. He appears at home with his investing style and has been fairly disciplined in his approach.

  • Fund Manager: Vinit Sambre
  • Investment Style: Small Growth
  • Investment Process: Sambre selects companies with sustainable competitive advantages and dominant market shares. He combines growth-styled quality stocks with value plays when constructing the portfolio.
  • Expense Ratio: 2.5%
  • Star Rating: 5 stars
  • Analyst Rating: Silver
  • Performance: The fund got noticed in 2009 and 2010. In the past 2 years it has been on a roll and delivered admirably.
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Ramesh Chandramouli
Feb 23 2017 08:11 PM
1. Franklin India Smaller Companies Fund
2. HDFC Midcap opportunities fund
have proven their performance in this category for decades.
Aravind Sankeerth
Dec 27 2016 08:53 PM
Good job folks. Nice list. I guess a newer fund called Indiabulls Value Discovery also fits the bill and the portfolio is rock hard. Its just a matter of time it proves itself in this list. I also admire the Union Small and Midcap Fund, has a very focussed yet well set out list of stocks with low churn
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