Mutual Funds: When Size Doesn’t Matter

Would you rather invest in Ford or Apple if you had the option of going back in time some 15- 20 years? The answer is a no brainer. So, why should your investment philosophy be any different today? In the equity markets, while size and scale of a business you are investing in does matter, it should not be your only rule for zeroing in on prospective investment opportuni- ties. It is true, no doubt, that investing in large well-run companies ensures a certain downside protection for your money, but in today’s fast changing business environment, the level of protection is declining.

Companies that have a unique proposition to offer, which draws a large section of consumers, have the ability to quickly scale up and emerge the stars of tomorrow. On the other hand, strong traditional businesses might find that their business is severely threatened overnight by a leap in technology. Obsolescence is a high risk in today’s environment given the high level of innovation being unleashed by rap- idly emerging start-ups, funded by big- money investors.

In light of this, investments in equities need to be far more dynamically managed today than they were in the past. And, any promising opportu nity shouldn’t be let go just because it doesn’t fit a certain market capitalisation criteria. Investing in funds that focus only on large cap or mid cap stocks today is like asking your fund manager to do only half his job, especially if you won’t the most out of your equity portfolio and aren’t risk averse.

Large cap funds are typically meant for investors who prefer the comfort of investing their money in strong track re- cord, blue chip companies. The belief being that these well-managed large corporations will be able to identify growth opportunities and exploit them better than many smaller businesses. Also, the security of strong existing operations and cash flows will help them better cope with any adverse developments. In other words, they present a lower risk equity exposure.

Mid-cap companies are much smaller businesses, they have proved them- selves to attain a certain scale of business, but they are yet to scale to a big business level. Whether they will or will not, is where the risk lies for an investor. Many mid-cap companies also manage to scale from a small size fairly rapidly when they aren’t paid much attention to by the big players in the sector. The minute the dominant players start perceiving them as a threat is when things hot up. Take the case of Patanjali, emerging from the blue to threaten the likes of big- wigs like Hindustan Unilever and P&G. To bar your fund manager from investing in a mid-sized company at the right time would be like clipping his wings.

The best strategy keeping the present market situation in mind is to invest in a multi-cap equity scheme. Such a fund allows the fund manager to switch be- tween large and mid cap stocks based on his perception of the future market trend and the growth opportunities. There are several multi-cap, diversified equity schemes on offer and you should evaluate the past performance, volatility of returns, fund house track record and fund manager performance before zeroing in on the fund for you.

Happy investing!

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