Bank of India’s Mid & Small Cap Equity & Debt Fund: A Unique Approach for High Risk, High Rewards

The Bank of India’s Mid & Small Cap Equity & Debt Fund, abbreviated as BOIEDF, stands out in the aggressive hybrid fund segment due to its unique equity strategy. Contrary to the norm where such funds heavily rely on large-cap stocks, BOIEDF has sidestepped this approach to focus entirely on mid and small-cap entities. This has allowed the fund to leverage the greater expansion potential of these smaller businesses, resulting in a compounded annual return of 16.5% since its inception in July 2016.

One must however note that a higher risk is associated with the fund’s concentrated investment in the volatile mid and minor cap segment. This makes BOIEDF a less favorable option for risk-averse investors, or ones seeking a steadier hybrid fund allocation. The fund’s strategy is based on a high-risk, high-reward model.

Aggressive hybrid funds typically allocate 65–80% of their portfolio to equities, with the balance invested in debt instruments. This mix is aimed at achieving a balance between growth and stability, making it apt for investors looking for equity-level returns but with less fluctuation than pure equity funds.

For the last five years, BOIEDF has persistently kept its equity exposure within the 70–78% range, focusing on the growth potential of mid and small-cap stocks. To mitigate the volatility inherent in equity investments, the fund uses its debt allotment as a stabilising mechanism.

BOIEDF consistently drops any investment that enters the large-cap sector to remain true to its commitment to mid and small-cap entities. The fund’s allocations show that an average of 46% has been invested in mid-cap stocks, with 31% going to small-cap benefactors. Small-cap investments are carefully vetted against rigorous quality checks, with preference given to businesses that have solid operational models.

To manage liquidity risk, the fund makes sure that at least 80% of its portfolio could be liquidated within six working days, even assuming just 20% market participation. This critical risk management measure limits individual small-cap investment to no more than 3% of the total portfolio.

Stock selections for BOIEDF are executed with discipline, guided by financial parameters like return on equity, strength of cash flow, and qualitative assessments of business sustainability and competitiveness. The current disposition of the portfolio leans towards local themes that align with government-driven capital expenditures.

The fund’s preferences stay inclined towards sectors such as infrastructure, power and consumer discretionary. It exercises selectiveness while dealing with financial services, non-consumer discretionary, and IT sectors. The fund adheres to a policy of diversification, as evidenced by it holding between 40 and 68 different stocks over the past five years.

BOIEDF’s debt investments serve as a cushion against market volatility. Managed by Alok Singh, the fund follows a conservative debt strategy, primarily focusing on short-term instruments with 1–2 year tenures, majorly picking AAA and AA+ rated securities. The use of high-yield credit bets is consciously evaded.

The fund maintains a passive but tactical approach to its debt allocation with the objective to handle liquidity and temper market volatility. With this scheme, the fund is well-equipped to weather market fluctuations and seize opportunities without the compulsion to offload equity investments under market stress.

BOIEDF’s performance has shown merit during bullish trends, such as August 2020-December 2021 and August 2022-December 2024. Nonetheless, during market pullbacks, it failed to keep up with its peers. A major instance being from December 2024 to March 2025, where it reported -17% returns against the -13% average for its category.

Despite temporary fallbacks during corrections, BOIEDF’s overall performance has shown resilience, reflecting robust long-term results. An averaging of five-year rolling returns yielded 18% annually, comfortably overshadowing the category average of 13%. However, this impressive performance also means increased volatility: the fund’s annualised deviation of 15.7% is the second highest in its category when compared to the average figure of 11.7%.

Other aggressive hybrid plans like LIC MF, HSBC and JM Aggressive Hybrid also have mid and small-cap allocations, but these usually amount to about 35%. With BOIEDF’s markedly higher 71% investment, it stands as a higher risk option, albeit with higher expected returns. While it may not be the best fit for low-risk investors, it holds a distinctive position for those who partially wish to invest in volatile mid and small-cap funds, providing a balance between growth potential and a level of stability. For long-term investors, it could possibly be a valuable addition to their portfolios for improved adjusted risk returns, while ensuring the equity ratio remains manageable.