Invest in tomorrow’s potential leaders, today.

An open ended equity scheme predominantly investing in midcap stocks

Midcap Fund

June 2020

What are Midcaps?What makes Midcaps an interesting investment bet?

What are Midcaps?

Every phase has its own importance for success of business.However, the Growth Phase sees maximum Wealth Creation for stakeholders including investors…

Growth phase and wealth creation can be a long term process and creation of wealth depends upon various factors. There is no guarantee that all the companies in Midcap space will be able to create wealth.

Initial phase Growth phase Matured phase

Typical growth path of a good business

Data as on 31st Dec 2019. Source: AMFI; Bloomberg

What are Midcaps?

Largely Entrepreneur Driven

Mature business

Lower volatility

Longevity

Large Caps Small Caps

Leader in smaller sectors Niche players in established sector

Market cap rangefrom `8,243 Crs to

`26,288 Crs

The Midcaps

“Sweet Spot”High growth potential

Higher volatility

Nifty Midcap 100 TRI vs Nifty 50 TRI on daily rolling returns

Nifty Midcap 100 TRI outperformance over Nifty 50 TRI Nifty 50 TRI outperformance over Nifty Midcap 100 TRI

The potential of Midcaps to outperform large caps increases significantly over longer time horizon

Midcaps have better odds to outperform large caps… Odds only gets better with time…

Data as on 29th May 2020; Source: MFI Explorer. Past performance may or may not be sustained in future. Daily rolling returns for Nifty Midcap 100 Index is available from Jan 2003 & hence above analysis is done from inception of index.

Why Midcaps?

3years

5years

10years

Data as on 29th May 2020; Source: MFI Explorer. Past performance may or may not be sustained in future. Daily rolling returns for Nifty Midcap 100 Index is available from Jan 2003 & hence above analysis is done from inception of index. - For Illustration purposes only. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.

On 3, 5 and 10 years daily rolling returns basis, Nifty Midcap 100 TRI has delivered more than 15% CAGR for more than 50% of time.

In the study, Nifty Midcap 100 TRI has no negative observation in 5 and 10 year periods.

Returns dispersion – in percentage of observations

Why Midcaps?

Midcaps have better odds to outperform large caps… Odds only gets better with time…

Returns >15% 36% 53% 29% 51% 38% 47%

Returns >8% and <15% 37% 22% 49% 31% 55% 50%

Returns >0% and <8% 25% 16% 22% 18% 7% 3%

Returns < 0% 2% 10% 0% 0% 0% 0%

Total no. of observations 3,567 3,068 1,829

Years Daily Rolling Return

Years Daily Rolling Return

Years Daily Rolling Return3 5 10

Nifty 50 Nifty Midcap 100 Nifty 50 Nifty Midcap

100Nifty 50 Nifty Midcap

100Returns Range

Growth of Nifty 50 TRI and Nifty Midcap 100 TRI

In Jan 2003, Mr. A invested Rs. 1 Lakh in Nifty 50 TRI and Mr. B invested Rs. 1 Lakh in Nifty Midcap 100 TRI.As on 29th May 2020, Mr. B’s return outscored Mr. A’s returns by Rs. 6.18 Lakhs

Data as on 29th May 2020; Source: MFI Explorer. Past performance may or may not be sustained in future. Data for Nifty Midcap 100 TRI is available from Jan 2003; hence the above analysis is done from the inception of indexFor illustration purposes only. Expenses have not been considered. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature.The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.

Why Midcaps?

0

500

1000

1500

2000

2500

3000

Jan-03 May-20

Nifty 50 TRINifty Midcap 100 TRI

Rs. 17.26 lakhs

Rs. 11.07 lakhs

Investment of Rs. 1 Lakh

Nifty 50 TRI and Nifty Midcap 100 TRI rebased to 100 as on 1st Jan 2003

Is it the right time to invest in Midcaps?

Food for thought !!!How long will the current underperformance continue?

Data source: NSE; Data as on 29th May 2020. Past performance may or may not be sustained in future.The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.

Historically, all periods of Midcap underperformance are followed with periods of outperformance…

Why Midcaps now?

71%

15%

-1%-11%

23%

-7%

25%

1%

-6%

12%

-12%

25%

11%4%

19%

-19% -17%

-1%

CY2

003

CY2

004

CY2

005

CY2

006

CY2

007

CY2

008

CY2

009

CY2

010

CY2

011

CY2

012

CY2

013

CY2

014

CY2

015

CY2

016

CY2

017

CY2

018

CY2

019

CYT

D20

20

Midcap Outperformance as compared to Nifty 50

Source: Motilal Oswal Securities Ltd. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.

21.9

Nifty 50’s total market cap hasincreased to an all time high in Dec’19

Why Midcaps now?

Whereas…Nifty Midcap 100 total market cap is44% lower than its peak of Dec 2017 and also below the Dec’14 levels

13.7 20

.3 28.8

14.7 27

.6 38.4

31.3 38

.7

42.7 55

.5

54.5

57.1 76

.0

78.9 90

.0

74.7

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Dec

-19

May

-20

Nifty 50 - Market Cap (INR Tn)

2.8 3.6 6.

5

2.8

6.7 8.

2

6.9 9.

0 11.0

16.7

17.0

16.7

21.9

15.9

16.1

12.3

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Dec

-19

May

-20

Nifty Midcap 100 - Market Cap (INR Tn)

Why stock picking is key to investing in Midcaps?

We performed an analysis on 101st to 250th stock by market cap as on 31st May 2010. Our observations are as follows:

Analysis 1

67 out of 142 posted positive returns while

75 companies posted negative returns during this period

Out of 150 companies, 142 survived this period142

67

50

23

The average returns of top 50 companies is15.6% CAGR

23 of the then Midcap companies are today’s large cap stocks

Data as on 29th May 2020. Source: Capitaline. Past performance may or may not be sustained in future. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcapperformance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.

Stock picking is the key

11.0 34.819.3(Britannia Inds.)(Godrej Prop)

Data as on 29th May 2020. Source: Capitaline. Past performance may or may not be sustained in future. The 10 year CAGR (May 2010 to May 2020) of 150 stocks have been ranked in descending order. Ranks 1-35 are 1st quartile, 36-71 are 2nd quartile, 72-106 are 3rd quartile and 107-142 are 4th quartile. Stocks referred above are for illustration purposes only and should not be construed as stock recommendation. The schemes of Principal Mutual Fund may or may not hold these stocks currently or in future.These companies may move in or out of midcap list based on market movements.

High returns dispersion makes stock picking the key to wealth creation in Midcap investing

1st Quartile

2nd Quartile

4th Quartile

Min Returns (%) Average Returns (%) Max Returns (%)

3rd Quartile

-17.4 -4.2-10.7(GE Power)(HMT)

-4.1 10.33.6(Voltas)(GE Shipping)

-46.4 -17.8-29.0(Tata Tele Mah.)(KSK Energy Ventures)

Qua

rtile

Ana

lysi

sWe performed an analysis on 101st to 250th stock by market cap as on 31st May 2010. Our observations are as follows:

Analysis 1

Stock picking is the key

Returns as on 29th May 2020. Source: Capitaline, Internal Analysis. Past performance may or may not be sustained in future. * Stock Listing - AMFI

Returns Range 10 years 5 years

>50X 2 0

10-50X 10 0

5-10X 21 2

3-5X 28

1-3X 21 22

50%-100% 5 16

0-50% 12 24

-50-0% 319

>-50% 1916

Data Not Available 3446

Total Companies 150

There is wide dispersion of returnswithin the 150 Midcap stocks in thelonger term.

41 stocks have grown over

3X in the last 10 years.

26 stocks have grown over

2X in the last 5 years.

Longer holding period resulted insignificant returns to the investor.

Stock picking is the key

Opportunities

Threats/ Risks

We performed an analysis on 101st to 250th stock by market cap as on 31st Dec 2019*. Our observations are as follows:

Analysis 2

Returns as on 29th May 2020. Source: Capitaline, Internal Analysis. Past performance may or may not be sustained in future. * Stock Listing - AMFI

There is wide dispersion of returnswithin the 150 Midcap stocks inshorter term like last 3 year.

34 out of 150 stocks have deliveredmore than 10% CAGR.

Conversely, 75 out of 150 stockshave delivered negative returnsduring the same period.

Stock picking is the key

We performed an analysis on 101st to 250th stock by market cap as on 31st Dec 2019*. Our observations are as follows:

Analysis 2

In a nutshell

Past performance may or may not be sustained in future.

Right stock selectionin Midcap stocks is the key towealth creation

Midcaps are bettermultipliers in the long term, despiteshort term volatility

With longer time spentin Midcaps, chances of Outscoring large caps are better

Stock picking is the key

IntroducingPrincipal Midcap Fund

Investment Objective and StrategyRisk Reward FrameworkPortfolio DiversificationRegulatory and Internal risk limits

Performance attribution analysisBenchmark and peer group analysisRisk / Reward analysis

Equity Investment ProcessStock Universe

In-house Research

Third Party Research

Industry Experts

Management Meetings

6 Pillar Investment Framework

IdeaGeneration

DueDiligence

StockSelection

Investment Universe(200-225 Stocks)

Portfolio Monitoring and Evaluation

Portfolio Construction(Compounders + Alpha Generators)

BusinessDynamics

Operating Matrix

Size,Scalability &

Longevity

Operational efficiencies

Quality &Sustainability of

profits

Management quality &

Business model

Efficiency &Distribution of

capital

Price the Value and not Value

the Price

Profitability Quality of Growth ValuationCapital

Allocation

The 6 Pillars of our Investment Process

Portfolio Construction Portfolio Review Sell Discipline

• Strict adherence to investment process

• Meet every company before investing

• Buy and Hold Strategy with typical horizon of 2-3 years

• Benchmark agnostic

• No active cash calls

• Single Midcap stock allocation not exceeding 4%

• 3-4 annual interactions with portfolio companies

• In-house earnings estimates with regular monitoring

• Continuous monitoring of Corporate Governance and Promotor Pledge

• Focus on valuations

• Consensus earnings catching up with our estimates

• Adherence to Target Price achievement

The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.

Portfolio Management

The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.

An integral part of our portfolio construction and portfolio management strategy

Investment objective & strategy

Portfolio risk-return framework

Diversification

Exclusions if any

Other considerations

Alignment of the investment idea to the mandate

Regulatory & Internal risk limits

Sector or stock limits

Tracking error

Liquidity of the stock

Concentration risk

Beta of the stock

If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business…

Risk Management

The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme. Sectors stated above should not be construed as recommendation from Principal Asset Management and/ or Principal Mutual Fund. The schemes of Principal Mutual Fund may or may not hold any position in these sectors. The views given above may change from time to time.

Investment opportunities

with possibility of…

Turnaround/Business Restructuring• Improvements in business environment or

Company fundamentals• Cost control measures and Operational

efficiencies• Change in Management• Changing regulations• Balance sheet restructuring• Product rationalization and innovation

Value Migration• Addition to Product offering• Play on premiumization and changing

consumption pattern• Technology and Innovation in products

and process• Identify early stage of change in

business/industry cycle

Value Unlocking• Corporate action, Mergers and

Acquisitions opportunities• Identifying intrinsic value opportunities

New Age Economy• Emerging sectors• Currently India is poised for numerous

such opportunities in spaces like Insurance, Healthcare, Renewable Energy, Asset/Wealth

Managers, Fin-Tech,

eCommerce Movie Exhibition Migration to Electric

Vehicles Organized Retail Logistics

Principal Midcap Fund Investment Strategy

7 Member strong equity fund management team

Over 1500 company annual interactions with companies

Over 100 man years of investment team experience

Use of GRP(Principal's proprietary investment software)

Successfully invested in Midcap space as part of our other portfolios

In-house Research Capabilities

Fund Facts (As on 31st May, 2020)

67.70

Marketcap Breakup

4.92

Top 5 Sectors

Stock Name % of NAV

Tata Consumer Products Ltd. 4.16

WABCO India Ltd. 3.97

Abbott India Ltd. 3.44

Bayer Cropscience Ltd. 3.38

Page Industries Ltd. 2.64

Jubilant Foodworks Ltd. 2.58

Max Financial Services Ltd. 2.41

Atul Ltd. 2.33

Whirlpool of India Ltd. 2.24

Info Edge (India) Ltd. 2.20

Top 10 Stocks

7.11

7.80

8.84

8.84

9.99

Industrial Products

Consumer NonDurables

Finance

Auto Ancillaries

Pharmaceuticals

65.58

20.99

9.33

0.183.92

Mid Cap

Large Cap

Small Cap

Debt

Cash & Other

Top 3 Overweight Top 3 Underweight

Pesticides Chemicals Textile Products

HealthcareServices

Software Gas

Fund Details

Nature of SchemeAn open ended equity scheme predominantly investing in Midcap stocks.

Investment ObjectiveTo generate long term capital appreciation by predominantly investing in equity and equity related instruments of Midcap companies.However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved.

Investment PlanDirect & Regular

Investment OptionsGrowth & Dividend

BenchmarkNifty Midcap 100 TRI

Minimum Application Amount• New Investor – ` 5,000/- for both Dividend and Growth Option and any

amount thereafter under each Plan/Option• Systematic Investment Plan: Minimum twelve installments of ` 500/- each• Systematic Transfer Plan: Minimum Six installments of ` 1,000/- each• Regular Withdrawal Plan: Minimum Six installments of ` 500/- each

Load Structure• If redeemed/ switched on or before 365 days from the date of allotment: Nil for redemption/ switch out of units upto 24% of the units allotted

(the limit) 1% on redemption in excess of 24% of the limit stated above-

Redemption of units would be done on First in First out Basis (FIFO)• Nil thereafter. (w.e.f. March 31, 2020)

Fund ManagerMr. Ravi Gopalakrishnan has over 29 years of experience in researchand asset management business. During the course of his career, hehas worked across many Asset Management Companies, includingCanara Robeco AMC, Pramerica AMC, and Sun F&C AMC. He hasmanaged several funds across Large Cap, Multi-cap and Midcapstrategies. He has a very strong research background and has soundknowledge of the fund management business. Mr. RaviGopalakrishnan is a M.S. Finance(Investments) & holds a M.B.A.

Associate Fund ManagerMr. Sudhir Kedia has over 14 years of experience in research andasset management business. During the course of his career, he hasworked with Mirae India AMC and ASK Investment Managers. He hasmanaged Hybrid strategies and other Multi cap portfolios is hisearlier organisations.He has a very strong research background and has soundunderstanding of the fund management business.

DISCLAIMER: The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document ofthe scheme. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the solediscretion of the reader. This material should not be relied upon by you in evaluating the merits of investing in any securities or products. Diversification does not guarantee investment returns and doesnot eliminate the risk of loss. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors maynot get back the full amount invested. Past performance may or may not be sustained in future. The views and strategies described may not be suitable for all investors. Furthermore, whilst it is theintention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met. Investors are advised to consult their Investment advisors fordetermining their risk appetite and Tax Advisor before taking any investment decision.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Product Label