Mutual Funds

Fund Talk: Do your homework with funds

K. Venkatasubramanian | Updated on August 12, 2012

Don’t expect a fund to generate extraordinary returns in a choppy market

I am stuck with funds such as DSP BR Micro Cap, Reliance Banking and Sundaram Financial Services Opportunities, as these have not appreciated in the past two years. What should I do to bring back to life these ‘dead’ investments with minimal loss of invested amount? — N. Sridharan

Many funds appear to have underperformed over the past two years as the broad markets haven’t gone anywhere in this period.

Calling these investments ‘dead’ may be a tad harsh as two of the three funds you mention haven’t done reasonably well. You will have to compare the fund’s performance with its benchmark and peer funds. If the fund has outperformed its benchmark and category average, you cannot call it an underperformer.

A fund cannot be expected to generate extraordinary returns when market conditions are poor. After all, domestic funds invest in stocks from the same underperforming market. They may at best contain losses or generate returns better than the benchmark. Also, the time frame you have assigned to pronounce a verdict is quite short.

Both DSPBR Micro Cap and Reliance Banking fell marginally over a two-year period. But so did the market. In fact, if you take DSBR Micro Cap, it fell 4.3 per cent annually in the last two years, as against the 17 per cent annual fall in its benchmark, BSE Small Cap. To that extent, the fund has done its job of containing declines well.

DSPBR Micro Cap has done extremely well over the past one year of volatile market conditions, despite being focussed on mid- and small-cap stocks — a segment that can be highly unpredictable in market swings.

Same is the case with sector fund, Reliance Banking. Both these funds have a good track record over the past three to four years. So, retain both these funds.

You can exit Sundaram Financial Services Opportunities that has underperformed for several years now. Also, if you need a banking fund in your portfolio, Reliance Banking would be a better fit.

Wait for at least three to five years, over which period these funds may be expected to deliver superior returns.

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My monthly income is Rs 20,000. I wish to start an SIP of Rs 3,000 a month for the next 10 years in a mutual fund. My agent recommends Tata Pure Equity Fund or Tata Equity P/E fund. Which one should I go for? — Nivedita

Agents may push products that will fetch them maximum commission. While they do get it right at times, occasionally their recommendations may not be backed by sound long-term track record of the fund.

Your decision to invest in a fund should be based on your own research, aided by extensive reading on mutual funds and sound advice from experts where needed.

Both the funds on your agent’s list have a reasonably good track record with Tata Pure Equity carrying an edge, as the fund has a longer track record.

Having said that, there are better options. More so, as you have a fairly long time horizon.

Consider investing Rs 1,500 each in HDFC Balanced and Quantum Long Term Equity. Both funds have had an excellent run over the past five years.

Queries may be e-mailed to >mf@thehindu.co.in.

Published on August 11, 2012

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