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Axis Midcap Fund: Focusing on Managing Risks
Jun 22, 2021

Since the market crash of 2020, we have witnessed a sharp rally in the mid-cap space and there may be still some steam left. But, it can be risky to invest in mid-cap funds expecting similar returns in the near future.

When you invest in mid-cap funds or any other fund for that matter, avoid setting your mind on where you expect the markets to head over the short term. Remember that your investment in mid-cap funds can be prone to high volatility in the short term, though they have the potential to generate attractive returns in the long run. Therefore, as an investor, you should keep a long-term focus and use any major market correction as an investment opportunity.

Besides, you should be aware of the risk involved and preferably opt for only well-managed mid-cap funds that focus on quality stocks.

Axis Midcap Fund (AMF) is one such mid-cap fund whose focus on quality high growth-oriented midcap stocks has paid-off its investors handsomely over the long term.

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Graph 1: Growth of Rs 10,000 if invested in Axis Midcap Fund 5 years ago

AMF is a growth-oriented mid-cap biased fund that follows the bottom-up approach to stock picking. Belonging to a process-driven fund house, it focuses on investing in high quality and liquid stocks in the mid-level and higher mid-cap segment having potential to grow cash flows over the medium to long term time horizon. Over the past few months, it has gradually increased its holdings to around 55 stocks from 35-50 stocks earlier, probably keeping in mind its growing asset size. AMF combines the growth potential of mid cap with the stability of large caps to reduce the risk in the portfolio. During the market crash of 2020, its performance was commendable; it managed to substantially limit the downside risk. However, the fund could not fully participate the ensuing swift recovery phase that was largely driven by momentum stocks. Over the past 5 years, AMF has rewarded investors with a CAGR of around 21%, as against 16.1% CAGR delivered by its benchmark S&P BSE Mid-Cap - TRI index, thus generating a healthy alpha of around 5 percentage points.

Table: Axis Midcap Fund's performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year StdDev Sharpe
PGIM India Midcap Opp Fund 1,615 112.87 44.91 24.59 21.63 18.35 25.42 0.221
Quant Mid Cap Fund 72 98.71 40.01 23.92 18.77 16.88 24.33 0.222
Axis Midcap Fund 11,834 66.48 30.21 21.54 21.00 18.99 19.02 0.228
Tata Mid Cap Growth Fund 1,216 73.11 26.22 19.31 17.96 18.35 23.47 0.174
Kotak Emerging Equity Fund 12,463 88.85 29.89 18.78 19.41 21.60 24.66 0.173
Edelweiss Mid Cap Fund 1,359 93.24 31.55 18.38 19.72 19.63 24.75 0.163
Invesco India Midcap Fund 1,574 68.60 27.40 18.26 19.07 19.05 22.40 0.180
BNP Paribas Mid Cap Fund 914 80.21 29.22 18.07 17.11 18.13 22.84 0.168
Nippon India Growth Fund 9,746 84.05 26.33 17.47 18.02 16.43 24.49 0.162
DSP Midcap Fund 12,162 66.52 26.82 16.91 18.23 18.60 21.87 0.156
S&P BSE Mid-Cap - TRI 83.43 25.52 13.61 16.09 15.5 26.02 0.12
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on June 16, 2021
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

After going through a prolonged underperformance between 2015 and 2017, AMF's preference for quality stocks paid off from 2018 onwards when the midcap segment started correcting. The fund has managed to generate a significant lead over the benchmark and category average across most time periods. Over the longer time periods of 5-year and 7-year, the fund has managed to keep a clear lead over its benchmark and the category average.

Coming to its risk-return parameters, AMF has encountered much lower volatility (18.99%) when compared to its category peers and the benchmark. The fund's superior outperformance over the last few years has helped it generate higher risk-adjusted returns for investors. Its Sharpe ratio is currently the highest in the mid-cap funds category and well ahead of the benchmark.

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Investment strategy of Axis Midcap Fund

AMF is mandated to invest a minimum 65% of its assets in mid-cap stocks. It aims to select larger mid-cap companies that are flexible, innovative, and have high growth potential along with the proven mettle of its management and capacity for liquidity. Axis as a mutual fund house is biased towards playing long-term growth stories and holds stocks with a long term view.

Over the past few years, the fund house has strengthened quality check measures and tightened its risk management process as well as the approval process. Moreover, the fund manager also restructured the portfolio of the fund to have a sharper focus. The results could be clearly seen in the fund's performance registered over the past three to five years.

Following a combination of the top-down and bottom-up approach of stock picking, AMF invests in a fairly diversified portfolio of 50-55 stocks, limiting exposure to single stocks within the 5% mark. Through the bottom-up stock picking, the fund focuses on company fundamentals and ignores the broad macro-economic trends.

Although AMF follows a buy and hold investment strategy, it is agile in its approach and does not hesitate to churn a small portion of its portfolio to capture attractive opportunities in the mid-cap segment.

Graph 2: Top portfolio holdings in Axis Midcap Fund

As on May 31, 2021, AMF held a fairly diversified portfolio of 57 stocks. The top-10 stocks accounted for around 34.3% of its assets, of which four are large-cap names. Among mid-cap names in the portfolio, Cholamandalam Investment & Finance Co. topped the list with an exposure of around 5%, followed by Voltas, Astral, Coforge, Crompton Greaves Consumer Electricals, and Supreme Industries having an allocation of around 2.5% to 4% each. The large-cap names among its top holdings include PI Industries, ICICI Bank, Bajaj Finance, and HDFC Bank.

AMF gained immensely from its holding in Astral, Cholamandalam Investment & Finance Co, Voltas, Mphasis, Mindtree, PI Industries, Tata Consumer Products, Bajaj Finance, Trent, Cadila Healthcare, among others in the last one year.

In terms of sector holdings, AMF's portfolio is skewed towards Banking & Finance stocks with combined allocation of about 20.5%, closely followed by Infotech and Engineering with respective allocation of 13.2% and 11%. The fund's other core sectors include Consumer Durables, Pharma, Retail, Cement, Fertilisers, Auto Ancillaries, and Consumption having allocation in the range of 4-9%.

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Suitability

AMF focuses on highly liquid large and larger mid-cap stocks that provide the fund an advantage of quick liquidation of the portfolio in case of extreme conditions. Although AMF is an aggressive growth-oriented mid-cap fund, it avoids taking momentum bets and focuses on high quality stocks.

Even though AMF has penchant to churn its portfolio, it has shown a lot of patience with many of its quality stocks and sectoral bets which have paid off its investors in due course. Such approach may work in favour of the fund in the long run. The current fund manager - Mr Shreyash Devalkar has done well to turn the fortune of the fund around.

AMF is suitable for aggressive investors looking to earn capital appreciation over the long term from quality mid-cap stocks.

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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