Investors who do not wish to park their money only in the large cap index stocks or restrict their horizon to a particular sector theme, and are willing to take the risk of riding the growth wave in the country, by investing in a variety of next genre companies with a higher risk/reward ratio, can take a look at the ICICI Prudential Emerging S.T.A.R. Fund.

Launched in October 2004, Prudential ICICI Emerging S.T.A.R (Stocks Targeted At Returns) Fund is an open-ended equity fund, that is focused primarily on the mid-cap sector, and invests in stocks with market capitalization between Rs 100 crores to 2000 crores. It follows a blend of top-down and bottom-up approach to stock picking. As the fund manager, Deven Sangoi puts it," We first do a detailed study of the sector/industry and then identify businesses, which have the potential to grow over the long run. As the scale of business changes, we expect these companies to grow and become large cap companies".

Funds of this genre, invest in small and mid cap sectors (having new stories and themes); its this versatility that enables them to tap the growth opportunities available in the small and mid-cap arena; in companies which hold potential of becoming tomorrow's large caps, which could dole out handsome returns to the investors over a period of time.

While analyzing the fund on the returns front, the fund has given returns of 52.89% since inception and 47.67% over a 2-year period, as against its benchmark Nifty Junior Index`s 37.91% and 36.19% returns respectively. However the fund has not been a conspicuous performer in the short run; knowing that the fund is basically focussed on the heroes of the future, judging the fund on a short-term basis, would be going against the investment philosophy of the fund.

The assets under management (AUM) of the fund, increased from Rs 785.01 crores in April 2006 to Rs 1099.26 crores in April 2007.

The portfolio is fairly diversified, with about 50 stocks in the portfolio at present, though it has decreased its exposure from the earlier 70 stocks in November 2006. The top 10 stocks of the fund represent just about 32% of the portfolio which is amongst the lowest in the category of equity diversified funds, signifying a good spread, and the contribution of top 3 sectors is about 40%. Stocks like Deccan Chronicle, Nucleus Software, Subex Azure and India Infoline top the list and Software, Industrial Products and Media are the top three sectors the fund has invested in. The fund has a Sharpe ratio (a measurement of the performance of the fund in relation to the risk taken) of 0.40 and a Beta of 0.96 (Beta is the measure of a portfolio's volatility in comparison to the market. A Beta of less than 1 is considered less risky).

Software, which is not the flavor of the season, features topmost on the list of sectors the fund manager has invested in. Describing his strategy, Deven explains, "Under software we identified that product based businesses are less manpower sensitive, as compared to services business, and hence we increased focus towards such sector in our portfolio. Our research team then undertook detailed bottom up approach, to identify promising companies with sound management practices."

The fund has stuck to its investment theme of being a truly diversified equity fund with investments across all sectors in small and mid cap companies. Not having the likes of Infosys, TCS, SBI, or RIL in its list, it keeps company with Tech Mahindra, 3i Infotech, and Mphasis, touted by many to be the torchbearers of tomorrow.

The fund has the option of investing a small part of the corpus in the F&O segment, in addition to investing upto 10% in debt and money market instruments, enabling it to take advantage of the rising interest rates, compared to other funds, which do not have such options.

The fund has added India Cements, Cummins India, Nagarjuna Construction and Century Textiles in the current month's portfolio, while it has exited from Triveni Engineering, Fedders Lloyd, Shree Ganesh Forgings, Ansal Properties, BEML and Kalpataru Power. On a sectoral basis, the fund has increased its exposure to cement, industrial products and banking sector while reduced its exposure to industrial capital goods, consumer durables and construction sector over the pervious month. On further scrutiny, we find that the manager has bet on lesser-known companies like Webel Energy, Kewal Kiran Clorthing, Beck India and Stone India.

India is in a phase, wherein it is witnessing an accelerated growth in fortunes of select companies because of global business prospects and financial & operational efficiencies. Hence there is an opportunity to identify stocks with re-rating stories and potential to graduate from mid cap to large cap. There is enough evidence to vindicate that a lot of smaller companies of late 1990s and early 2000s have grown to become large. Who knows, the stocks that the Emerging S.T.A.R has invested in, might truly become the 'stars' of tomorrow!