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HDFC Mutual Fund: Mid and Small Cap Sector Valuations Look Reasonable
February 21, 2011

HDFC Mutual Fund has recently completed 10 years. In this article, we understand the fund house's equity outlook for 2011 and highlight their new fund offering HDFC Debt Fund for Cancer Cure, an initiative to support cancer patients.

Author : Dhanashri Rane

 HDFC Mutual Fund: Mid And Small Cap Sector Valuations Look Reasonable

Year 2011 has started on a bad note for the Indian equity markets with almost 11% correction in January. The lackluster performance of the markets can be attributed to deteriorating macroeconomic environment that was hampered by rising food price inflation and higher oil prices. The scene was further worsened by political scams and governance issues. To get a clear perspective for retail investors in these uncertain times, we interviewed HDFC Asset Management (HDFC) for their standpoint on equity markets.

Key Points

  • India is especially vulnerable to rising oil prices which is inflationary

  • High interest rates will increase the cost of capital and will affect corporate earnings, if the trend continues over long term

  • Banking, consumer, pharmaceutical, IT sectors offer prospects of healthy and secular earnings growth

  • The systematic investment plan route continues to be an ideal way to invest in diversified equity funds

  • New Fund Offer: HDFC Debt Fund for Cancer Cure, a close-ended capital protection fund that aims to provide financial support to cancer patients


iFAST: Inflation has been a major worry for the economy. Furthermore, real rates remain negative with the central bank hiking rates to contain the inflationary pressures. How are these macro-economic developments expected to impact the corporate sector and markets?

HDFC: RBI has increased its inflation forecast for Financial Year (FY) ending March 2011, from 5.5% to 7%. It is an area of concern on the macroeconomic front as it has forced RBI to hike the interest rates. Overall, higher rates of interest will increase the cost of capital and will affect corporate earnings if the trend continues over a longer period of time.

India is especially vulnerable to rising oil prices which is inflationary. We think if prices increase by another US$ 10 - 20 from the current levels, it would put serious pressure on the economy at least for a year or so and it is possible that the growth rate may slow down temporarily. In such a scenario, earnings growth should also temporarily slow down. On the flip side, if oil prices were to correct USD 10-20, it would be positive and the macroeconomic pressures will abate, at least partially.


iFAST: What are the main reasons for the below expectation performance of mid cap and infrastructure stocks? Would mid cap and infrastructure stocks be better performers in the medium term?

HDFC: Firstly, we will comment on the infrastructure space. There is a slowdown in orders in the infrastructure space. This is driven by problems in land acquisition, environment clearance, financial closure, etc. We think these issues tend to get resolved over time. We do not see these impacting earnings meaningfully in aggregate for the markets, as the weightage of engineering companies in the markets is modest and for the banks the pricing environment is good.

Considering the performance of the mid cap stocks, in our opinion, mid and small cap sector valuations look reasonable. Hence, their prospects look encouraging over the medium term.


iFAST: BSE Consumer Durable and Auto were the best sectors in 2010. Do you foresee these sectors to continue to be the drivers for the market in 2011? Which other themes are likely to play in 2011?

HDFC: The auto and consumer durable sectors did well as part of the consumption theme which played out in 2010. We feel that banking, consumer, pharmaceutical, IT are sectors that offer prospects of healthy and secular earnings growth.

Of late, we have also been increasing exposure in a small way to global cyclical as the global economy seems to be recovering.


iFAST: The BSE Realty has been badly hit in the last few months. However, the real estate prices are again near to their all-time high. What is your outlook on the sector?

HDFC: The rising interest rate scenario does not augur well for the real estate prices. Besides, corporate governance issues impact their valuations.


iFAST: Which funds would you recommend to retail investors in the current scenario?

HDFC:  Diversified equity funds are the ideal for investment by investors looking for exposure to equities from a medium to long-term perspective. The systematic investment plan route continues to be an ideal way to invest in these funds.


About HDFC Debt Fund for Cancer Cure

For the first time in India, a mutual fund investment allows you to contribute for a noble cause. The scheme offers 50% and 100% dividend payout option whereby investors can donate the respective percentage of dividend income earned from the fund, i.e., 50% and 100% to the Indian Cancer Society* as a financial assistance to the ill and needy patients (with annual household income less than 1.5 lakhs).  The HDFC Debt Fund for Cancer Cure would invest mainly in fixed income and money market instruments having a tenure that is in line with the period of the fund. Being a social initiative, HDFC shall not charge any investment management and advisory fees to this fund.

Benefit under the Income Tax Act, 1961: The investor of HDFC Debt Fund for Cancer Cure would be eligible to receive tax deduction under Section 80G of the Income- tax Act, 1961 on the amount of donation made to Indian Cancer Society.

  • Fund Manager: Anil Bamboli
  • Investment Strategy: The net assets of the Scheme will be predominantly invested in highly rated fixed income securities like Debt, Money market instruments and Government Securities maturing on or before the maturity date of the Scheme. The primary objective of the Scheme is to endeavor to protect the capital and generate income through investments in high quality fixed income securities like Debt / Money Market Instruments and Government Securities maturing on or before the maturity date of the Scheme
  • Minimum application amount: 1 Lakh
  • Scheme Rating: AAA (sovereign) by CRISIL
  • NFO period: February 18 – March 4, 2011
  • Redemption: 3 years after date of allotment

To Buy, Click here

*The Indian Cancer Society (ICS), a Public Charitable Trust is India’s oldest anti cancer NGO established in 1951. It provides affordable and innovative solutions for the detection and treatment of Cancer, and for the post rehabilitation of survivors and is dedicated to the fight against cancer through its numerous countrywide activities. (To know more about ICS, visit website-

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Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.

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