The Hindu Business Line : Fund Talk

I have SIPs in Reliance Growth, Franklin Prima and HDFC Capital Builder for more than a year now. Some of these are performing below average in the last six months. Do you suggest a switch? If I want to start some more SIPs at this juncture, which other schemes would you recommend? I feel that Reliance Regular Savings Fund-Equity, Magnum Contra and Franklin India Opportunities are performing well. Moreover I find that schemes with manageable corpus are able to perform well consistently. I seek your advice.

Gurudas Aras

All the three funds you are now invested in are mid-cap oriented schemes with a good long-term track record. During the market correction in May, mid-cap stocks bore the brunt of the hit and the performance of many a mid-cap fund has been uninspiring since then. Your portfolio returns, no doubt, also appear discouraging, as you have held them for the last 1-1.5 years. Among the funds you mention, both Reliance Growth and Franklin Prima invest heavily in mid-cap funds, the former being more aggressive. HDFC Capital Builder, although a mid-cap fund, cushions its portfolio with large-cap stocks. Thus, while it has not been a top performer in a mid-cap rally, it has shown more consistency.

Mid-cap funds are bound to be more volatile than other diversified funds. While they may outperform their conservative peers by a mile, they are also prone to periods of sustained underperformance. On your question of whether you should switch, you should make the decision based on two issues: Are you willing to take the roller-coaster ride, wherein over the long term (in a fund with sound track record), the ups and downs may even out to deliver decent returns?

And, if so, what is the proportion of mid and small-cap exposure you wish to have in your overall portfolio?

If you find the former worrisome, you can switch to large-cap funds such as HDFC Top 200 and Franklin India Prima Plus. Otherwise, continue with the present portfolio and reduce your monthly SIP in the present funds depending on the exposure you prefer in mid-caps. You can instead start SIPs in funds such as SBI Magnum Contra, DSP ML Opportunities and Kotak 30, in the light of their superior track record.

While Reliance Regular Savings Equity and Franklin Opportunities have delivered well in the short term, they are relatively new funds.

It is true, that some funds have the risk of losing flexibility when assets swell due to trading and stock selection difficulties. Mid- and small-cap funds can find it difficult to trade larger positions without affecting the prices. Franklin Prima and Reliance Growth faced this difficulty and chose to close fresh investments for some time before opening again. A scheme with a huge corpus, however has more options to make diversified investments. Franklin India Flexicap, for instance, invests across 50 stocks with varying market caps. HDFC Equity with assets over Rs 3,000 crore and a bias for large-cap stocks has managed to stay focussed. Hence, while asset size can determine performance, the fund's managing style and objectives are also factors to look out for.

If the investor opts for dividend reinvestment in an ELSS fund, can the reinvested amount also can be claimed as deduction or does an investor have to take out the dividend payout and make as a fresh investment to avail tax benefit If so, under which Section of the Income Tax Act is this benefit available?

M.K. Krishna

If you opt for the dividend re-investment plan under an ELSS, you are entitled to deduction under Section 80C of the Income Tax Act, in the year of reinvestment, provided it falls within your overall investment limit of Rs 1 lakh. The dividend, which is automatically reinvested by your fund, amounts to your subscribing for additional units and thus qualifies for fresh deduction. But you need to keep in mind that in an ELSS, a dividend reinvestment would mean locking the fresh amount for another three years from the date of such a receipt. So, if you are looking to cash out on the principal that is already locked in for three years, then it is best to opt for dividend payout.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Vidya Bala

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