For years, mid and small-cap mutual funds have carried a reputation for two things: explosive upside and brutal drawdowns. When small-caps fall, they fall hard and fund managers could do little but watch, since selling means booking losses and buying more means catching a falling knife.
The Equity Ex-Top 100 Long-Short Fund changes the playbook.
What This Fund Does Differently
This strategy invests a minimum of 65% in equity and equity-related instruments of stocks outside the top 100 by market capitalisation, essentially mid-caps, small-caps, and below. The remaining portfolio can include any listed equity.
On top of that, the fund manager can take short positions of up to 25% of net assets through unhedged derivative positions, but specifically in stocks other than large-caps. So the shorts are also in the mid/small-cap universe, not in Nifty heavyweights. So the manager isn't going long on small-caps and hedging via Nifty futures.
Where This Strategy Shines
Large-cap stocks are heavily researched. Pricing inefficiencies are quickly arbitraged away. But mid and small-cap stocks are under-researched, under-covered by analysts, and far more prone to mispricing.
This means a skilled fund manager has more genuine alpha opportunity here than anywhere else. A company with deteriorating fundamentals that the market hasn't caught up to yet? Short it. A hidden gem trading at a discount? Go long. The Ex-Top 100 universe is where active management has historically earned its fees and this strategy lets managers act on negative views just as aggressively as positive ones.
But remember this: mid and small-cap stocks are inherently more volatile, less liquid, and more sensitive to macro shocks than large-caps. The 25% short book can cushion drawdowns but cannot eliminate the underlying volatility of this segment.