India's Best Fund Managers 2019

“Generating alpha is harder without volatility”

Chirag Setalvad says an efficient market can be more challenging than a turbulent one

RA Candroo

The best captains don’t steer away from turbulent waters but ride through them with a steady hand. Managing the largest mid-cap fund in India, Chirag Setalvad, believes it is usually easier to outperform during bouts of volatility. This senior fund manager at HDFC Mutual Fund says that, by being consistent, diversifying and understanding businesses you invest in, risk can be managed and even leveraged. With elections around the corner, the market could see dips and highs, but Setalvad believes that the effect of polls is only short-term. According to him, in the long-term, market performance will be driven more by fundamentals. 

While you are the largest mid-cap fund in the market, does your size sometimes become a constraint? 

Not really. Despite the size increasing, we have maintained the same level of diversification, kept portfolio turnover low and retained our mid-cap focus (and have not drifted towards larger companies). At the same time, we continue to construct the portfolio on a bottom-up basis and invest in good quality, reasonably priced companies. So, the fund philosophy has not changed. Thus, size has not substantially altered the way in which we manage the fund.

Firstly, despite being the largest mid-cap fund, the portfolio’s weighted average market-cap is one of the lowest amongst peer funds. The concern with assets under management (AUM) size is that when a mid-cap fund becomes too large, it starts to invest in larger companies. We have maintained the weighted average market cap of our portfolio at closer to or lower than that of the benchmark. Today we are invested about 70% in mid-caps and 30% in small-caps. We have not gravitated towards larger companies. We have ensured that our style has not drifted.

Secondly, we have been consistent in our diversification. We have had about 60 stocks in our portfolio since inception and a larger AUM has not resulted in over diversification.

In addition, keep in mind that the AUM increase has been a combination of price appreciation (the net asset value is 5x in about 10 years) and fund inflows. The size increase has taken place ove

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