Lotus India AMC has launched Lotus India Mid Cap Fund, its maiden midcap fund in the equity-diversified category. It's a three-year close-ended scheme that plans to invest upto 65-100 per cent in midcap companies.

So, how does one define a midcap fund?

Investment expert Sandeep Shanbhag says, "LIMF gives itself a fairly large mandate as the meaning of midcaps as per its offer document are companies which have a market capitalization of less than the last stock of S&P CNX Nifty and more than 5 per cent of the market capitalisation of the last stock of the S&P CNX Nifty.

What this would mean in real number terms is that the scheme plans to invest in stocks having a market capitalisation varying anywhere from around Rs 250 crore (Rs 2.5 billion) to around Rs 5000 crore (Rs 50 billion)."

Tridib Pathak, CIO - Equity, Lotus India AMC adds, "Our definition of midcaps is a dynamic one, and it takes into account the realities of the market place, as what is midcap keeps evolving with the market size. We feel any stock, which has market cap lower than that of the last stock in S&P Nifty, which is a large cap index, is eligible for being considered as midcap."

Pros and cons of investing in midcaps:

The whole idea behind investing in a mid cap fund is to invest in companies which are today's mid caps and have the potential to become tomorrows large caps.

Advisor Hemant Rustagi says, "Since LIMF intends to invest in midcap stocks, it has the potential to do well over the longer term. Also, the closed ended structure of the fund encourages investors to have a long-term view, which is necessary for a fund like this."

"However, investors should also keep in mind that the midcap theme is more risky than a simple diversified equity scheme as mid cap stocks fall the most when the markets fall. The recent fall in the markets has proved this again, with the mid and small cap indices falling faster than the others," adds Shanbhag.

Pathak accepts the fact that there is greater risk associated with midcaps, but believes that LIMF will have a 'lower risk, higher return' characteristic. He explains, "Midcap investing in general is risky, and midcaps fall more in a falling market, mainly due to lower liquidity in these stocks. But we feel our fund is a 'lower risk, higher return' product. This is due to 2 reasons:

Midcap investing should necessarily be 'long term 'investing. It involves identifying the 'size migrators'. In an economy like ours with sustainable high growth,  'Growth' leads to 'Opportunities' which when exploited lead to 'Size migrators' i.e companies which increase their size and become big.

In the last 5 years the number of companies with a market cap of more than US$1bn has risen from 17 to 107. Most of these have been midcap companies, which have 'migrated' their size and have become large caps. With continuing growth in the Indian economy, we believe this will continue to happen. But this takes time.

That is why our fund is a 'Close ended' fund for 3 years, as it brings in the discipline of long term investing. When one invests with this spirit, which we have outlined above, we feel then that midcap investing is a 'lower risk, higher return' strategy.

Our fund will not invest in normal midcaps. We do not want to invest in midcap companies, which are doing well just because the business cycle is favourable now, but which do not have the potential to become 'size migrators'.

We will invest only in those midcap companies, which have the potential to become a large cap company over the next 3 years or so. For this, we will invest only in those midcap companies which have one of the following 5 characteristics where it

• is a leader/first mover,
• belongs to a 'sunrise' industry,
• is a globally competitive company,
• is a company with a niche positioning
• is a proxy to large caps.

Almost all midcap companies, which have become large cap companies in the last 5 years, have had one of the five characteristics.

So, given the focus of our fund, we believe our fund has a 'lower risk, higher return' characteristic."

Who can invest in Lotus India Midcap Fund?

"Considering the fact that the fund will be investing in one of the riskiest segment of the market, it may not be suitable for the first time investors as well as those who are not willing to take high risk even in their equity portfolio", says Rustagi.

However Pathak counters, "Considering our mindset as explained in the response above, we believe the fund is suitable for all investors who are serious, disciplined long term investors."

Conclusion:

Experts believe that risk averse investors should stay away it, but for those looking to include mid-cap funds or enhancing exposure to these funds in their portfolio, existing mid-cap funds with excellent long term track record can be a better bet.

"LIMF's progress could be evaluated over the next year and exposure could be taken if it indeed performs as per the promise of its pedigree," adds Shanbhag.

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