Who doesn’t know about HDFC Mid cap Opportunities fund? It is one of the star funds from the HDFC MF stable.
The fund started its journey in July 2007, almost at the height of the previous bull market. Its current fund managers are Chirag Setalvad and Rakesh Vyas.
The fund seems to have done really well. The regular plan of the fund boasts point to point returns of 28.63%, 20.95%, 26.26% and 17.82% for 1, 3, 5, and 10 years respectively. (see image below)
Compared to its benchmark, Nifty Free Float Midcap 100, the performance of which is 28.32%, 16.91%, 19.25% and 11.49% for the corresponding periods. The benchmark performance excludes dividends.
Even the expense ratio of the regular plan is one of the lowest in what most of its peers charge.
It has been an impressive streak of performance, no doubt.
Yet, every time an investor came asking for advice about this fund, I would say NO.
Why? Where’s the problem?
Source: Unovest. Data as on July 2, 2017. All regular plans.
There is one big problem.
The AUM of this fund now stands at Rs. 16,605 crores. On the basis of AUM size, the next fund in the mid cap category is less than Rs. 6,000 crores.
Given the impressive past performance, brand HDFC and the fact that most investors rely on just past performance to make their investment decisions, the size is only going to grow further.
Please note, for a mid cap fund, large size can be its Achilles heel.
You see, in the entire stock market size of say 100%, about 80 to 85% of the market capitalisation is contributed by large cap companies. About 15% is contributed by mid cap companies and the rest by small and micro cap companies.
With such a limited market size for the mid cap space, a fund such as HDFC Mid cap Opportunities with its size is going to have problems finding investment “opportunities“, sooner than later.
In my view, the fund faces two clear choices:
Choice 1 – Go ahead and play it Warren Buffet style, buy complete businesses and let them deliver. Unfortunately, the SEBI rules will not allow it do so.
Choice 2 – Convert itself into a flexicap / multicap fund, change its benchmark to a broader market index such as Nifty 500 and become unchained to go and seize opportunities across the market.
The second choice seems more probable. And the fund has precedence to refer and follow.
ICICI Pru Value Discovery Fund did the same thing. This Value Discovery fund, which started its journey as a mid cap fund in Aug 2004, was forced to convert itself into a multicap fund in 2015. Driven by its past performance, it received huge fund flows (it crossed Rs. 10,000 crores in AUM).
But wait! Once it converts into a multicap fund, the returns are going to become muted compared to its midcap avatar. After all, mid caps are expected to have a higher risk-reward ratio.
There is going to be yet another problem if HDFC Mid cap Opportunities fund coverts into a multicap fund.
HDFC MF already has HDFC Equity, its flagship fund, in the same category. How can it pit one of its own fund against another one of its well known fund? Double dilemma!
I look forward to see what is HDFC Mutual Fund going to do with its gargantuan sized HDFC Mid cap Opportunities Fund.
- Let it grow and end up acquiring larger, though often not so liquid, stakes in mid and small size companies.
- Convert it into a multi cap fund and pitch it against its own flagship fund. Yes, let’s have some healthy competition.
Actually, there is a third choice available too. The ideal choice!
Close HDFC Mid Cap Opportunities fund for fresh subscriptions.
Come on HDFC MF, you can do it. Here’s one more chance for you to prove that you are a leader. That you don’t exist only for AUM and you have investor’s best interests in your heart.
Ah! Am I expecting too much? Looks like.
How can the fund house stop the AUM flow? It is like removing the oxygen mask. AUM! That is what the fund management business is for. That is what gives the fund houses their glory. And of course, more AUM means more fees!
Well, HDFC MF is going to take its own call.
I am more interested in what are you going to do as an investor. What will you vote for if the fund house asks you?
Do share your views in the comments box.
Further read: The big bad world of Mutual Funds