Too much volatility in returns? Review your MF portfolio every six months

It may not pay to buy and hold an equity mutual fund forever. The stark contrast in returns between the top performers and the laggards among equity schemes has made it critical for investors to review their holdings more frequently, said investment advisors.

For example, in the last one year, the best performing fund in large caps – Axis Bluechip delivered 24.71 per cent returns, while Franklin India Bluechip returned 6.22 per cent, a gap of almost 17 per cent. In the Multi-cap fund category, IIFL Focused Fund has delivered 27.65 per cent in a year, while ICICI Focused returned 0.5 per cent.

Higher volatility in the markets has led to a set of blue chips performing better than the rest. Those funds which have managed to hold these blue chips have managed to do well. Others like Axis Bluechip have done well because of high cash holdings. Some of the underperforming schemes have exposure to stocks with poor corporate governance that have been battered in recent months.

Investors may not be able to identify the best performer every year but consistent underperformance is a red flag. Investment advisors have different periods to evaluate the health of portfolios. For many of them, a bad show for three years is a good enough reason to exit from the scheme.

“Periodical review of portfolio once in six months or in a year is a must,” said Amol Joshi, founder, Plan Rupee, a Mumbai-based financial planner. “If the underperformance vis-a-vis peers in the same category is large and continues for more than three years, investors should understand the reasons and should not hesitate to exit the fund,” he said.

The mid- and small-cap fund categories too have seen divergent trends. Over a three-year period, Axis Midcap Fund gave a return of 15.43 per cent while SBI Midcap Fund gave a return of 1.43 per cent. Over a five-year period, HDFC Small Cap delivered 18.93 per cent returns while Quant Small Cap returned 0.76 per cent.


“If a fund underperforms its category average for three years, it definitely is on my watch list. It shows the fund manager calls are not in line with market and for an aggressive investor and calls for corrective action, which includes a switch to a better performing fund,” says Shankar S, founder of Chennai-based Credo Capital.

Financial planners said poor performance has been because of higher exposure to sectors or stocks that did not perform.

In the recent past, funds that were overweight on telecom sector and bought stocks like Bharti Airtel and Idea underperformed.

Similarly, those with a higher exposure to pharma stocks underperformed as stock prices corrected due to increasing USFDA scrutiny. With NPAs mounting, fund managers who went overweight on PSU banks or PSU as a theme underperformed. On the other hand, funds that were overweight on HDFC Bank, Kotak Bank, Bajaj Finance, Reliance Industries generated higher alpha. Axis Mutual Fund became one of the best performing fund houses in the last one year with many of its schemes being top performers as it bet on quality and held 10-20 per cent cash in many schemes.

Longer periods of poor performances could result in investors missing out on targets set for such investments.