Ask Morningstar: Should I exit my focused fund?

By Nehal Meshram |  03-08-22 | 
 
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About the Author
Nehal Meshram, Senior Research Analyst at Morningstar. She would like to hear from you, but cannot give financial advice.

From scratch, I have learned a lot about investing from your website. Axis Focused 25 is not performing well. Should I continue? I have Rs 5,000 surplus. Where must I invest it? Currently, here are my SIPs:

  • Rs 5,000: PGIM India Flexi Cap Fund
  • Rs 5,000: PPFAS Flexi Cap
  • Rs 2,500: Mirae Asset Emerging Blue Chip
  • Rs 5,000: Axis Midcap
  • Rs 5,000: Axis Focused 25
  • Rs 4,000: SBI Small Cap
  • Rs 2,500: Motilal Oswal S&P 500 Index Fund.

We appreciate the time and efforts you spent on visiting our website and learning from it. It appears that you have given significant attention to your fund selection.

The first question on fund performance.

Regarding your question on exiting from Axis Focused 25, you need to understand that there could be a bout of underperformance and it should not be a cause of worry. Your decision on redeeming an investment shouldn't be made primarily on short term performance. It is important that an investor must experience a full market cycle. It is likely that the fund is experiencing a temporary downfall because of the fund type, market volatility or the fund manager’s strategy which is not in sync with the current trends. We believe that one should not exit a fund abruptly as the same fund can bounce back more strongly than others with the change in market conditions. Thus, it is extremely important to have a long term investment approach – at least 5-7 years to witness the true benefits.

Also, it is important to keep your return expectations in check. Being invested in the best-performing fund all the time is not possible. Even the best funds could experience some ups and downs occasionally. If you try to chase returns, you probably end up losing. To get more clarity on this, please read our Mind the Gap study which we published recently. Please do read The gap between investor return and investment return.

We believe that Axis Focused 25 has the necessary capabilities to bounce back strongly. The fund is managed by an experienced portfolio manager Jinesh Gopani since June 2016. His expertise as a stock-picker stands out. The fund follows a concentrated growth-oriented strategy with a focus on large-cap stocks. Since the fund maintains a concentrated portfolio it could be risky but it also offer superior returns if held for a long period. When choosing stocks, the portfolio manager follows a bottom-up investment strategy and a sound investment process. The fund has witnessed a significant growth in assets over the past year but that has not diluted the portfolio or the execution of the strategy. The AMC has internal limits in terms of capacity, and we think that this is a positive.

The fund has relatively underperformed its peers in 2021 and so far in 2022. However, the market has recently been highly volatile, and as mentioned, some strategies may perform poorly in certain market scenarios. You may continue with your investments if you are fine with the risk associated with this kind of strategy.

The second question on where to invest.

You do not seem to have a large cap fund in your portfolio list. We believe that large cap stocks must be a core holding. Large-cap funds invest in the top 100 listed companies which are likely to be leaders in their respective businesses. These funds typically would at any time invest a minimum of 80% in large-cap stocks. Large cap companies are with stable businesses and given their size and track record, they are relatively less volatile during market downturns and are usually good compounders in the long term. To give you a perspective, during recent time when Covid-19 hit the market, large cap funds have fallen less than the small and mid-cap funds.

Here are our analyst’s views on some of the large caps funds:

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Articles authored by Nehal Meshram

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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