MF Query Board

MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

Should I add an index fund to my portfolio? What should be the proper allocation to an index fund? - Ranjit Sharma



There are two types of investment strategies: Active and passive. In the active strategy, the fund managers actively look after the portfolio to generate alpha over the benchmark. In the other one, only the portfolio is rebalanced periodically to obey with the strategy. An index fund is said to be under a passive investment strategy when it follows the index that it is tracking and has same constituents in the same weightage.

Of late, it has been noticed that index funds, or even ETFs (Exchange Traded Funds) for that matter, tracking large-cap indices are performing better than actively managed large-cap funds.



As we can deduce from the above mentioned table, the passively-managed index funds can beat the actively-managed large-cap funds, in terms of trailing 1-year, 3-year, and 5-year average returns. However, it is to be noted that this outperformance of index funds over large-cap funds is only in the large-cap investment space. In case of mid-cap stocks, actively managed mid-cap funds have been beating the index in the long term. So, you should be clear that, if you are looking to invest in an index fund, you should go for index funds with a large-cap theme. So, should you add an index fund to your portfolio? Yes, you should go ahead and add a large-cap index fund as they have performed well compared to actively managed large-cap funds over the years. Should you be completely relying on the index fund? No, not completely. Instead, you should strike a balance between both, large-cap funds and an index fund. It is advised to avoid reliance on one and, for this, you should invest in both. You can achieve the proper allocation to an index fund by understanding your risk profile. If you are a conservative risk-taker, then allocate more to index funds but, if you are an aggressive risk-taker, then allocate more to actively managed large-cap funds. As India is a developing nation, it is believed that it has a lot of investment opportunities, which, in turn, make actively managed largecap funds a chance to generate alpha over the index and this is exactly why it is important to have both in your portfolio.

I have Axis-focused 25 Fund in my portfolio. Looking at its outperformance in recent time, should I continue to hold or should I make an exit now? - Palak Chawla



When it comes to mutual funds, or even stocks many a time, people are in a real hurry to sell it off. There are two instances when people think of selling off their investments. First is when the price or Net Asset Value (NAV) is moving up and the second is when the price or NAV is moving down. When NAV is declining, people start selling due to the fear of further losses while, in case of a rising NAV, they sell in fear that they might lose the current profit. Either of this seems to be your case as well. However, there are certain things that you should consider before selling off your investment. The ideal scenario for selling off a particular investment would be either because you need the money for emergencies or your financial goal is near. Another case could be the investment holding no more attraction. In your case, if you have an urgent need for money or your financial goal is near, then go ahead and sell it off. However, if it is not so, then it will be better to hold it as Axis Focused 25 fund has performed really well, not just against its benchmark, but also against its peers.



As you can see in the above table, the Axis Focused 25 fund has performed well on the trailing return basis in almost every period, except for the 5-year period, where it failed to beat the benchmark. However, it was successful in beating its peers even in that period. Apart from that, it has beaten both, its benchmark and its peers in the rest of the periods. Considering all these factors, we suggest you hold this fund. Although you should understand that past performance does not guarantee future performance. It is also important to know that there are a few factors where you need to consider selling off your investments. Among these factors, the first one is rebalancing. Rebalancing means the restoring of your pre-determined asset allocation. Let's say, for instance, you have weighted a fund by 20 per cent and, due to movement in the stock market or even bond market, it becomes 25 per cent. Here you need to sell off 5 per cent to restore your pre-decided asset allocation of 20 per cent. Hence, you should not just focus on the profits to get out of a particular fund as you do it in the case of stocks. Rather you need to have a 360-degree view of the whole situation and then take the decision of selling off your funds.

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