If there is any conclusion to be drawn from the performance of equity mutual funds over the past year, it is this - this is a stock picker's market. The only way to the top is bottom up. Times when funds would blindly select the best scrips in favoured sectors are long pass�.

When it comes to picking stocks, funds are looking beyond large-caps. And mid-caps are the pack that rules the roost these days. Interestingly, the way top stocks are shuffled in the portfolios of leading performers signifies one thing - picking stocks in this market is almost as tough as finding a needle in a haystack.

When you look at the top performers for the past 12 months (as on April 20, 2005), you can see that most of them have a huge mid-cap orientation. 

For instance, the top funds in terms of returns include SBI [Get Quote] Magnum Global Fund (one-year return of 80.35 per cent), SBI Magnum Sector Umbrella - Contra (62.10 per cent), Reliance Growth Fund (59.26 per cent), Sundaram Select Mid-cap Fund (55.49 per cent), Franklin India Prima Fund (54.02 per cent) and HDFC [Get Quote] Capital Builder (50.93 per cent).

Mid-caps have outperformed
Most of these funds have portfolios which are heavily skewed in favour of mid-cap stocks. And when you consider that CNX Midcap 200 Index has by far been the best index performer in terms of returns (66.12 per cent) in the past 12 months, the story becomes clear. For the record, BSE Sensex managed a return of 11.02 per cent. 

The list of funds launched recently includes Kotak Midcap, Magnum Midcap, Sahara Midcap, Chola Midcap, Sundaram SMILE and CanEmerging Equities, apart from HSBC Midcap Equity Fund and ING Vysya Midcap Fund. 

Exposure to CNX Midcap 200
(In %) Scheme	AUM (Rs cr)	5-Mar	4-Dec	4-Mar
Franklin India Bluechip	1650.52	NA	NA	0.15
HSBC Equity Fund	1574.78	8.29	13.8	7.06
UTI Mastershare	1338.6	6.65	5.77	5.61
Franklin India Prima Fund	1320.25	45.58	42.7	26.83
UTI Mastergain 92	1263.05	10.34	6.2	4.69
HDFC Equity Fund	1074.59	21.67	19.4	8.77
Reliance Growth	1036.58	32.57	32.61	13.52
UTI-MEPUS	886.01	4.66	3.81	3.02
HDFC Capital Builder Fund	761.34	29.07	23.41	23.79
UTI Masterplus Unit Scheme 91	668.96	4.42	5.06	2.67
Source: www.mutualfundsindia.com

According to Gaurav Narain, equity fund manager at ING Vysya Mutual Fund, there are many reasons why mid-caps will record stronger growth in the future.

"The size of these companies remains small compared to the opportunity. The average growth of revenue and profit in mid-caps is also likely to be higher, apart from margin expansion opportunities," notes Narain. But what makes mid-caps tick is the lure of superior returns.

"Mid-caps have a higher potential for earning superior returns, through sheer growth of earnings as well as a re-rating of valuations," adds Narain.

Mid-caps are defined differently by funds.

However, they broadly fall in the market cap range of Rs 100 to Rs 3,000 crore (Rs 30 billion). Needless to say, given the vastness of the mid-cap pool, what makes fund schemes stand out is their superior stock-picking ability, which ensures superior returns.

"As far as general markets are concerned, mid-caps have clearly outperformed over the past year," notes Sashi Krishnan, chief executive of Cholamandalam Mutual Fund.

"Keeping that in mind many equity diversified funds have shifted their focus to the mid-cap segment in an effort to boost their returns," he adds.

According to Sandip Sabharwal, head of equities at SBI Mutual Fund, the current tilt towards mid-caps are due to various reasons. "Post-2000, when the markets crashed, the markets became very risk-averse and moved to large-cap stocks in a big way. However, of late we have seen mid-cap counters have become more liquid and companies across market-cap segments have also done well in terms of performance".

A varied universe
A look at the portfolio of leading funds mentioned above reveals one thing - there is no one single route to the top. The portfolios reveal a varied number of stocks which have enabled these funds in their climb to the top.
 

While Birla Midcap has Tata Elxsi [Get Quote], LIC Housing Finance [Get Quote] and McDowell & Company as its top holdings, SBI Magnum Global Fund has Arvind Mills [Get Quote], Havells India, KEC International [Get Quote] and Thermax among its top holdings.

Meanwhile, Sundaram Select Midcap has backed Balrampur Chini Mills [Get Quote], Lakshmi Machine Works [Get Quote] and Bajaj Hindustan [Get Quote] as its top three holdings.

Franklin Prima, among the most consistent equity diversified funds, has LIC Housing Finance, Indian Rayon, Eicher Motors [Get Quote] and Gujarat Gas Company [Get Quote] among its top holdings.

While it can be said that the bull run has largely been on the back of mid-caps, the variation in stock selection does point to the keen stock picking abilities of fund managers.

For example, SBI Magnum Global Fund has textile scrip Arvind Mills as its top holding as per its March, 2005 portfolio. A year ago the stock did not even figure in the portfolio.

While Arvind Mills has stayed as its top holding since December 2004, the fund did some adjustments in its portfolio during the period. The exposure to stocks like Balrampur Chini, KPIT Cummins and United Phosphorus [Get Quote] was reduced while there was a hike in holdings of Havell's India, KEC International, Jaiprakash Industries and Mercator Lines [Get Quote].

Birla Midcap Fund has successfully managed to churn its portfolio to stay on top. The fund had FMCG stock Britannia Industries [Get Quote] as its top holding 12 months ago, but as of March 2005, its leaning has changed towards Tata Elxsi. 

Stocks where MFs have increased exposure most
Stock	MF holding in (%)		Chg.	MF stake in  (Rs cr)		Chg.
	Mar 05	Dec 04		Mar 05	Dec 04	(Rs cr)
Megasoft	10.19	0.00	10.19	22.45	0.00	22.45
Century Plywood	8.69	0.00	8.69	0.00	0.00	0.00
Kesoram Ind	13.80	5.26	8.54	76.00	27.05	48.94
Infotech Enterprises [Get Quote]	14.50	5.99	8.51	59.19	16.61	42.59
Excel Ind	6.30	0.01	6.29	4.12	0.01	4.12
Clariant	13.66	7.55	6.11	41.14	25.32	15.82
Jindal Saw [Get Quote]	7.37	1.43	5.94	76.99	13.05	63.94
Orient Paper & Ind	7.23	1.72	5.51	14.96	2.29	12.67
Federal Bank [Get Quote]	16.84	11.49	5.35	170.47	123.73	46.74
Shivvani Oil	4.97	0.00	4.97	15.83	0.00	15.83
Automobile Corp of Goa	5.02	0.09	4.93	5.60	0.06	5.54
Adlabs Films [Get Quote]	6.13	1.35	4.78	17.15	3.40	13.75
Vimta Labs [Get Quote]	13.59	8.96	4.63	28.78	18.49	10.29
JK Ind	4.59	0.04	4.55	16.87	0.12	16.75
Simbhaoli Sugar	4.36	0.00	4.36	3.61	0.00	3.61
McDowell & Co	9.82	5.73	4.09	119.33	37.43	81.90
Savita Chemicals [Get Quote]	4.64	0.57	4.07	9.38	0.85	8.52
Dhampur Sugar	4.04	0.07	3.97	18.79	0.22	18.57
Tata Elxsi	11.09	7.17	3.92	63.70	34.66	29.04
Valecha Engineering [Get Quote]	6.62	2.79	3.83	4.50	1.50	3.00

In fact, when you compare the fund's December portfolio with the current one (March, 2005), you can see a perceptible shift. While MNC pharma stocks, Glaxo SmithKline and Aventis [Get Quote] held the top two positions in December, LIC Housing Finance and McDowell & Company were among the top three behind Tata Elxsi in March.

However, not all funds have felt the need to drastically change their portfolios in the past quarter. Funds like Franklin Prima and Sundaram Select Midcap have stayed the course with more or less the same portfolio in the past quarter. 

Stocks where MFs have decreased exposure most
Stock	MF holding in (%)		Chg.	MF stake in  (Rs cr)		Chg.
	Mar 05	Dec 04		Mar 05	Dec 04	(Rs cr)
Pennar Aluminium	1.48	13.43	-11.95	0.53	5.16	-4.62
Orissa Sponge Iron	0.16	10.63	-10.47	0.11	6.98	-6.88
Nagarjuna Construction	7.57	16.74	-9.17	68.70	101.40	-32.70
Dewan Housing Fin. Corp	5.00	13.19	-8.19	6.26	16.36	-10.11
Mysore Cements [Get Quote]	3.28	9.44	-6.16	5.66	15.75	-10.08
Jaipur Polyspin	0.28	6.33	-6.05	0.04	1.05	-1.01
Mangalam Cement [Get Quote]	3.84	9.24	-5.40	7.83	15.60	-7.76
Maral Overseas [Get Quote]	11.24	16.59	-5.35	7.81	15.33	-7.52
Indian Resort Hotels [Get Quote]	1.79	7.04	-5.25	1.31	4.20	-2.90
Sunraj Diamond Exports [Get Quote]	0.26	5.36	-5.10	0.01	0.39	-0.38
Energy Development Co	1.81	6.76	-4.95	0.86	3.33	-2.48
JK Synthetics [Get Quote]	0.31	5.09	-4.78	0.16	5.16	-5.00
Alps Ind	4.56	9.33	-4.77	2.97	6.43	-3.46
Bata India [Get Quote]	6.55	11.26	-4.71	25.95	49.82	-23.87
Premier Auto	0.06	4.69	-4.63	0.03	2.69	-2.66
Sintex Ind	14.99	19.60	-4.61	92.95	108.20	-15.25
Sunflag Iron & Steel	4.29	8.79	-4.50	12.94	21.24	-8.30
Aarti Ind	0.07	4.48	-4.41	0.24	19.49	-19.25
Indian Seamless Tubes	3.43	7.73	-4.30	7.41	11.82	-4.41
SVC Superchem [Get Quote]	0.03	4.07	-4.04	0.02	2.58	-2.55

In the case of the former, the top two positions were held by LIC Housing Finance and Indian Rayon, though there was a minor reduction in the allocation to both these scrips in March.

It is the same scenario for Sundaram Select Midcap Fund, too. The fund has stayed loyal to Balrampur Chini Mills as its top holding in the past quarter, with the other consistent stocks in its portfolio being Wyeth Lederle, Baja Hindustan, IVRCL Infrastructure, Grindwell Norton [Get Quote], Lakshim Machine Works, Sesa Goa [Get Quote], Indraprastha Gas [Get Quote] and Sundaram Clayton [Get Quote].

Follow the herd
Even when one looks at leading funds like Reliance Growth and HDFC Capital Builder apart from those already being mentioned above, one can see that funds are allocating money where the returns are.

And in a year when mid-caps ruled that is where the money has gone. While this is not to say allocations to large-caps have been cut down drastically, it can be surmised that fund managers prefer the mid-cap segment for providing a 'kicker' to their returns. 

Stocks where MF stakes have increased most in value terms
Stock	Change in MF stake (Rs cr)	MF stake in  (Rs cr)		Change in price (%)	MF holding (in %)		Change
		Mar 05	Dec 04		Mar 05	Dec 04
Punjab National Bank	390.64	592.12	201.48	-2.94	4.36	1.44	2.92
Infosys Technologies	278.44	1499.36	1220.92	7.83	2.46	2.16	0.30
Satyam Computer Services	234.78	988.54	753.76	-0.34	7.58	5.76	1.82
TCS	233.00	976.77	743.76	7.28	1.42	1.16	0.26
SBI	228.81	1822.12	1593.30	0.69	5.27	4.64	0.63
HCL Technologies [Get Quote]	186.79	468.79	282.00	7.91	3.99	2.59	1.40
ICICI Bank	177.06	482.03	304.98	6.00	1.67	1.12	0.55
Crompton Greaves	140.75	527.87	387.13	45.44	23.26	24.81	-1.55
Siemens	114.26	639.15	524.90	28.53	11.35	11.98	-0.63
Larsen & Toubro	106.17	1566.75	1460.58	1.34	12.12	11.45	0.67
Canara Bank [Get Quote]	104.36	147.07	42.71	-5.74	1.79	0.49	1.30
Jaiprakash Associates [Get Quote]	96.95	342.64	245.69	4.03	9.84	7.34	2.50
Jindal Vijaynagar Steel	93.44	139.58	46.14	5.89	3.00	1.05	1.95
Bank of Baroda [Get Quote]	89.72	126.52	36.80	-9.24	1.97	0.52	1.45
ITC	88.72	4540.70	4451.97	2.59	13.62	13.70	-0.08
McDowell & Co	81.90	119.33	37.43	86.03	9.82	5.73	4.09
Maruti Udyog [Get Quote]	80.32	342.85	262.53	-8.77	2.82	1.97	0.85
ABB	79.85	217.99	138.14	18.88	4.46	3.36	1.10
Bajaj Auto [Get Quote]	74.11	179.43	105.32	-4.43	1.64	0.92	0.72
Century Textiles [Get Quote]	72.16	253.92	181.76	27.10	12.20	11.10	1.10

While SBI Magnum Global has increased allocation to stocks like Infotech Enterprises, SKF Bearings and Blue Dart Express [Get Quote] apart from Arvind Mills during the March quarter, Franklin Prima has taken higher exposures to stocks like Gujarat Gas, Flextronics Software Systems and Marico Industries.

In the case of HDFC Capital Builder, higher money allocation is apparent in stocks like Avaya Global Connect, Mahavir Spinning Mills and Shree Cement, while the fund has pared exposure to such large-caps as SBI, Tata Steel [Get Quote] and ACC. 

Stocks where MF stakes have decreased most in value terms
Stock	Change in MF stake (Rs cr)	MF stake in (Rs cr)		Change in price (%)	MF holding (in %)		Change
		Mar 05	Dec 04		Mar 05	Dec 04
HPCL [Get Quote]	-582.22	452.10	1034.32	-23.61	4.36	7.62	-3.26
SAIL [Get Quote]	-500.56	189.81	690.36	0.56	0.73	2.67	-1.94
Indian Oil [Get Quote] Corp	-422.35	368.81	791.16	-14.54	0.72	1.32	-0.60
BPCL [Get Quote]	-412.31	275.96	688.28	-22.89	2.60	5.00	-2.40
Ranbaxy Laboratories [Get Quote]	-272.28	302.30	574.58	-19.78	1.62	2.47	-0.85
Grasim Ind	-260.82	732.18	993.01	-8.22	6.58	8.19	-1.61
Hindalco	-255.56	745.41	1000.97	-9.33	6.16	7.50	-1.34
MTNL [Get Quote]	-243.53	208.29	451.83	-25.89	2.88	4.63	-1.75
Mahindra & Mahindra	-192.17	591.74	783.91	-8.70	10.26	12.41	-2.15
Tata Steel	-177.83	923.38	1101.21	4.01	4.16	5.16	-1.00
Nicholas Piramal [Get Quote]	-144.42	95.37	239.78	-30.49	2.26	3.95	-1.69
Wipro [Get Quote]	-137.41	188.85	326.26	-10.28	0.40	0.62	-0.22
NTPC	-125.71	169.59	295.30	-1.89	0.24	0.41	-0.17
ONGC [Get Quote]	-118.49	956.64	1075.13	7.71	0.76	0.92	-0.16
HDFC	-112.43	113.39	225.82	-5.16	0.63	1.19	-0.56
ACC	-111.79	757.94	869.73	6.42	11.71	14.30	-2.59
Gujarat Ambuja [Get Quote] Cement	-110.47	265.81	376.28	0.01	3.68	5.21	-1.53
GAIL	-104.64	189.94	294.59	-8.15	1.06	1.51	-0.45
Union Bank of India [Get Quote]	-100.93	114.44	215.36	3.86	2.20	4.30	-2.10
Tata Motors	-98.45	363.92	462.38	-18.05	2.43	2.53	-0.10

Is the trend likely to stay going forward? While the plethora of launches in the mid-cap segment means that there will be any number of funds which are looking at mid-caps for higher returns, the current uncertainty in the equity markets may force others to toe a cautious line - read going defensive with a higher large-cap allocation at least for the time being.

"Considering the volatility that the markets are going through currently, there is a logical reason for funds to look at large-caps as a defensive ploy. In our (Chola Mutual Fund's) Multi-Cap Fund, which has a mix of mid-caps and large-caps, we have allocated a higher percentage to large-caps," says Krishnan.

The story continues The trend favouring mid-caps is even more evident in sectoral funds. Take for example FMCG funds, which have been the only ones to give positive returns in the past month. Franklin's FCMG Fund has ITC as its top holding at 10.39 per cent, followed by Tata Tea [Get Quote] and Nestle [Get Quote]. However, in terms of highest increase in exposure in the past quarter, the stocks which come out on top are JK Investor Treading, ICI (India) and Shaw Wallace [Get Quote]. For good measure, at the bottom of the pile is FMCG bigwigs, ITC, HLL [Get Quote] and Glaxo SmithKline Consumer, where the fund has reduced exposure significantly. Meanwhile, Prudential ICICI FMCG Fund has increased exposure to Trent, Gillette and Asian Paints [Get Quote] and Agro Dutch Industries [Get Quote] and pared exposure to ITC, P&G and Tata Tea. Technology funds, which were the best-performing sectoral fund category, have also been climbing down the large-cap ladder. For example, Alliance New Millennium decreased exposure to Infosys [Get Quote], TCS and Bharti Tele during the December-March quarter, while Franklin's Infotech Fund has increased holdings in Flextronics Software Systems and Ramco Systems [Get Quote] apart from Hexaware Technologies [Get Quote], while decreasing exposure to Infosys, Satyam and Wipro. Similar trends can be seen in pharma funds, too, where funds have largely shunned the mid-caps like Ranbaxy, Dr Reddy's Laboratories and Cipla and instead turned to lower market capitalisation stocks like Matrix Laboratories [Get Quote], Unichem Labs, Aurobindo Pharma [Get Quote], IPCA Labs and Dishman [Get Quote] Pharma. According to Sabharwal, the last six months have been difficult for the pharma sector because of severe price pressures in the generic markets overseas and MRP-related taxes in the domestic markets. "However, all the negatives, including VAT, appear to be priced into the stocks and from here onwards, companies should do well," he adds. Sabharwal's portfolio going forward would mainly comprise a mix of generic players and those doing contract manufacturing, which are mostly in the mid-cap space.