The objective of this mid-cap fund is to invest mainly in mid-cap and small-cap stocks for generate long-term capital growth. However, mid-cap funds have been known to stray from their objective

Moneylife Digital Team

Morgan Stanley Mutual Fund has filed an offer document with the Securities and Exchange Board of India (SEBI) seeking approval to launch Morgan Stanley Mid-Cap Equity Fund, an open-ended equity fund. The investment objective of the scheme is to generate long-term capital growth from an actively managed portfolio of medium and small capitalisation equity and equity-related securities, including equity derivatives.

The scheme proposes to invest 65% to 100% of the assets in equities and equity-related instruments of small- and mid-cap companies with a medium- to high-risk profile. Up to 35% of assets would be invested in equity and equity-related instruments of any other company with medium- to high-risk profile and up to 35% of assets in debt and money market instruments with a low- to medium-risk profile.

Medium and small companies are defined as having a capitalisation that is lower than the 100th stock in the BSE 200 or a Rs10,000 crore market capitalisation, whichever is higher. The benchmark index of the scheme shall be the CNX Mid-Cap Index.

The mid-cap stocks and small-cap stocks rise the fastest when the economy is in a growth mode. They are the blue chips of tomorrow. But they are also more volatile. Wrong timing can decimate returns over the short term as Morgan Stanley knows better than others. Its first fund launched in 1994, was stuffed with small- and mid-cap stocks, but suffered severe value erosion of 35% over seven years.

This mid-cap fund will invest a major portion of its assets in mid-cap stocks and the rest may be in larger companies. There are many examples of mid-cap funds that end up investing in large-cap stocks. For example, Axis Midcap Fund has invested in Infosys and TCS, Birla Sun Life MidCap Fund has invested in stocks like Glaxo Smithkline Consumer, Cadila Healthcare and Cummins India and BNP Paribas Mid Cap Fund has Titan Industries, Lupin and Ultratech Cement in its portfolio. Clearly, funds are quick to stray away from the investment objective when its suits them.

The total recurring expense would be 2.50% per annum on the average net daily assets.