MF QueryBoard

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I have invested some money in a multi-cap fund. Would it be wise to move my investments to index fund (direct plan) so that this can benefit from the rising index and low cost? Please advise.

-Revati Sukhan

This would depend upon your investment horizon. If your investment horizon is five years or more, then investing in a multi-cap fund would be a better choice than investing in index funds. We do agree on the fact that index funds have a fairly low expense ratio but they are not smart enough to cope with the active funds, specifically the multi-cap funds in the long-term.

Having said that, currently many actively managed funds are not able to beat the index. Even in the year 2019 they were underperforming the index with their high expense ratios. However, when it comes to a multi-cap fund which is a well-diversified equity fund, in the long-term we hope it will do better than index funds. However, if you are someone who wishes to invest tactically, then investing in an index fund at this moment would be prudent by keeping investment horizon of one to one and a half years.

Currently you are 64 years old and the investments that you have mentioned in the query are for your retirement needs. From a personal finance perspective, retirement investments should be conservative in nature unless you have a continuous source of income. We are not aware whether you are a professional or running a business. Hence, we are assuming that you are completely retire and have comparatively low income compared with the pre-retirement phase. Thus, in such a scenario it is important to secure your first 10 years of retirement needs by investing the corpus in a conservative portfolio. Then move on to create a portfolio having a mix of equity and debt. The investment horizon for the same would be 20 years from now. And finally, put the remaining sum in a portfolio that would be tilted more towards equity investments. This is known as a bucket strategy. Here you would need to divide the corpus in three buckets. The first bucket would take care of your nearterm needs. The next bucket will help you to have good inflation-adjusted returns and the final bucket will help you to grow your wealth.

Now coming to your fund query, it is recommended that you don’t depend on a single asset management company (AMC) for your investment needs. Talking about the HDFC Mid-Cap Opportunities Fund, during re-categorization activity this fund had changed its fundamental attributes. This means that previously this fund was predominantly invested in mid-cap and small-cap stocks but now it predominantly invests in mid-cap stocks. Hence, looking at its historical performance is futile. However, if we look at its recent performance, then this fund has not just underperformed its benchmark but also in its category. The table below clearly shows the same.

Having said that, this fund is not a pure mid-cap fund as its mid-cap holding is 67.98 per cent and that of the category is 76.59 per cent. Even its small-cap holdings are at 26.18 per cent as against the category which stood at 13.73 per cent. Therefore, this fund seems to be riskier than some of the other funds in this category. So, carrying so much risk in the retirement phase is not advisable. It makes more sense to book loss and exit from this scheme to invest in index funds.

Further, about the HDFC Equity Hybrid Fund, it follows 65 per cent equity and 35 per cent debt asset allocation strategy. However, looking at its performance, though it is able to match that of its benchmark it is not able to perform better than its category. When we look at its discrete performance, we can see that most of the time when it falls, it falls more than its category but many a times it fails to beat its category when the markets are in favour.

Having said that, it is better to move out of this fund and invest in some better managed funds in this category. Further, it is advised that rather than opting for aggressive hybrid funds, it is better to either opt for dynamic asset allocation fund or have a portfolio of equity, debt and gold funds.