Choose Small & Mid-Cap Funds To Mitigate Risk
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I have invested Rs 60 lakh to save for my retirement in 2019. Of this, Rs 12 lakh is invested in IDFC Premier Equity and Rs 18 lakh in Kotak Mid-Cap Fund. Should I hold or redeem these funds? - Avadhesh Taramani
You should certainly redeem your investment in Kotak Mid-Cap Fund, as the fund has not added value to your portfolio. As the table shows, the fund has underperformed its category and has generated negative returns during the last three years. The fund is also more volatile than its peers as it has a higher downside risk.
In contrast, IDFC Premier Equity Fund is one of the best performing Small & Mid-Cap funds, which has consistently outperformed the CNX Mid-Cap index and has generated high risk-adjusted returns.
| Fund Statistics As On August 13, 2013 |
|---|
| Scheme | Returns (CAGR) | Downside Risk |
|---|
| 1 Yr | 3 Yrs | 5 Yrs | 1 Yr | 3 Yrs | 5 Yrs |
|---|
| Franklin India Prima(G) | 10.22 | 2.17 | 9.76 | 3.02 | 5.89 | 11.1 |
| HDFC Midcap Opportunities(G) | 0.15 | 3.04 | 12.29 | 2.9 | 5.63 | 9.75 |
| ICICI Pru Discovery(G) | -0.28 | 1.76 | 13.86 | 3.08 | 5.43 | 10.73 |
| IDFC Premier Equity(G) | 7.01 | 2.79 | 13.04 | 2.52 | 5.64 | 10.19 |
| IDFC Sterling Equity(G) | -1.13 | 0.57 | 15.19 | 3.06 | 6.01 | 8.79 |
| Kotak Midcap Scheme(G) | -6.02 | -3.81 | 4.85 | 4.28 | 7.15 | 12.18 |
| CNX Mid-Cap | -4.92 | -7.33 | 3.21 | - | - | - |
You have currently invested half your portfolio in Small & Mid-Cap funds. These funds invest in stocks which have the potential to outperform Large-Cap stocks in the long-run but are also subject to short-term volatility, especially in falling markets, as illustrated in the table:
| Absolute Returns (Year-on-Year) |
|---|
| Index | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|
| CNX Mid-Cap | -30% | 24% | 138% | 25% | 35% | 29% | 77% | -59% | 99% | 19% | -31% | 39% |
| CNX Nifty | -16% | 3% | 72% | 11% | 36% | 40% | 55% | -52% | 76% | 18% | -25% | 28% |
The CNX Mid-Cap index has significantly underperformed the Nifty in falling markets. For example, when the global markets crashed in 2008, the Nifty fell by 52 per cent and the CNX Mid-Cap index fell by 59 per cent. The same phenomenon occurred in 2011, when the Nifty dropped by 25 per cent and the CNX Mid-Cap declined 31 per cent.
As you are now approaching retirement, you should use this opportunity to book profits in IDFC Premier Equity Fund and switch to relatively more stable Large-Cap equity funds. Large-Cap funds generally invest in blue chip stocks of well-established companies with strong financials and steady growth prospects.
The Large-Cap funds shown in the table have underperformed IDFC Premier Equity over the last five years, but are relatively less volatile as they have lower standard deviations and downside risks (on a long-term basis). Hence, these funds are more suitable for your portfolio. These are some of the best performers in the category and have generated higher returns in the long run than the Nifty.
| Fund Statistics As On August 13, 2013 |
|---|
| Scheme | Returns (CAGR) | Downside Risk | Standard Deviation |
|---|
| 1 Yr | 3 Yrs | 5 Yrs | 1 Yr | 3 Yrs | 5 Yrs | 1 Yr | 3 Yrs | 5 Yrs |
|---|
| Large-Cap |
| Axis Equity(G) | 14.58 | 3.65 | - | 1.93 | 5.24 | - | 3.32 | 4.13 | 4.06 |
| Birla SL Frontline Equity(G) | 10.4 | 3.23 | 10.2 | 2.82 | 5.65 | 9.72 | 4.3 | 4.58 | 7.29 |
| Franklin India Bluechip(G) | 3.51 | 2.42 | 9.22 | 2.87 | 5.28 | 8.97 | 3.87 | 4.25 | 6.68 |
| ICICI Pru Focused BlueChip(G) | 9.3 | 5.29 | 12.67 | 2.33 | 5.1 | 8.94 | 3.54 | 4.38 | 6.72 |
| UTI Equity(G) | 6.4 | 4.9 | 10.27 | 2.58 | 5.14 | 8.58 | 3.87 | 4.34 | 6.28 |
| CNX Nifty Index | 6.57 | 1.49 | 4.7 | - | - | - | - | - | - |
| Small & Mid-Cap |
| IDFC Premier Equity(G) | 7.01 | 2.79 | 13.04 | 2.52 | 5.64 | 10.19 | 3.65 | 4.56 | 7.52 |
Note: Axis Equity Fund was launched in January 2010
In conclusion, you should redeem your holdings in Kotak Mid-Cap Fund as its performance is disappointing. Furthermore, as you approach retirement, you should gradually reduce your exposure to Small & Mid-Cap funds (even top performers such as IDFC Premier Equity) and switch to Large-Cap funds. You should also rebalance your overall portfolio and reduce the allocation to equity so that the majority of your corpus is invested in fixed income products, which minimise the risk of loss.