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.

ICICI Prudential Long-Term Plan - G has hardly yielded any return for SIP investment over the last three years. Going forward what are its prospects?

- Joseph Thomas

We assume that your reference to ICICI Prudential Long-Term Plan – G means ICICI Prudential LongTerm Equity Fund, which is an equity-linked saving scheme (ELSS). You need to note that investment in ELSS is locked-in for three years. This means that even each systematic investment plan (SIP) is locked in for three years. If you wish to redeem your SIP, you cannot redeem the whole amount. You can only redeem those SIPs that have completed three years. To elaborate about this fund, half of the funds in this category are benchmarked against Nifty 500 TRI. A majority of the investment (75.26 per cent) is dedicated to the large-cap followed by 14.87 per cent in mid-cap and 9.88 per cent in small-cap stocks.

If we look at the portfolio concentration, its top 10 stocks contribute around 45 per cent of the portfolio with a total number of stocks at 67. Moreover, the top three sectors contribute around 51 per cent. This shows that the concentration risk is low with this fund. To get more insights, let us look at its returns and risk statistics.

In terms of returns, it has underperformed its category and benchmark in the past one year. However, in the long-term periods of three-year, five-year and seven-year periods, it has outperformed its category, even after accounting for the crisis due to the pandemic. It is only the ongoing crisis that has affected this fund. Its holding is in quality companies with good prospects. Hence, in the long term, this fund has the capability to perform better than its category.

Also, don’t allocate this fund to any of your financial goals; rather keep it only for tax-saving purpose. Further, if you are a conservative investor, then it is recommended to rely on Public Provident Fund (PPF) for your tax-saving needs. If you are a moderate investor, then investing in PPF and ELSS at 50 per cent each would be prudent.

Is it right to shift my investments from actively managed large-cap funds to passive funds since the former has failed to generate alpha while having a high expense ratio?

- Rashmi Suryavanshi

A global study shows that most actively managed largecap funds struggle to beat the index. Hence, it seems prudent to go for passive funds. Actively managed largecap funds have expense ratio from 1-1.5 per cent, whereas the cheapest index fund is available at 0.05 per cent. Therefore, even if an actively managed fund generates 1-2 per cent of alpha over its benchmark, it will hardly match the index funds or exchange-traded funds (ETF) due to their higher expense ratio. Further, there are several discount brokers that offer access to equity markets at zero brokerage. This makes investing in ETFs an easy task. It is very difficult to find an actively managed fund that is able to beat the benchmark consistently. By investing in ETFs or index funds you are at least assured of getting the benchmark returns. Hence, it makes more sense to shift your investments from actively managed large-cap funds to index funds or ETFs.

Further, you need to bear in mind that before investing in ETFs it is important to check its volumes. Lesser the volume, higher would be the impact cost. And in case of index funds, invest in those funds that have less tracking error and low expense ratio. 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.