MF QueryBoard

MF QueryBoard

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.

Presently, I have a SIP running in Franklin India Smaller Companies Fund, which I had started a year ago but looks like it isn’t performing that well now. In fact, I have lost a huge sum of my savings in this fund. So, should I hold on or exit from this fund?
- R Laxmipathi

A timeframe of just one year is a very short period to look at the performance of a small-cap fund. A small-cap fund needs to be invested with a time horizon of not less than 7-10 years. Hence, looking at its recent performance makes no sense.

Talking about the fund in question, Franklin India Smaller Companies Fund seeks to provide long-term capital appreciation by investing predominantly in small companies. Its current asset allocation shows that 61 per cent is dedicated towards small-cap, 25 per cent towards mid-cap and around 14 per cent towards large-cap. If we look at its portfolio then it is overweight in financials, technology and consumer durables while being underweight in chemicals, healthcare and services sector.

Taking into account its trailing performance, it is indeed underperforming its benchmark and category though in the long term, say seven years or so, it has performed in line with the category.

 

Though the risk, as measured by standard deviation, is low as compared to index and category, in terms of risk-adjusted returns – Sharpe ratio and Sortino ratio – it lags behind the index and category. Therefore, if your investment horizon in more than seven years, it would do well to monitor this fund for the next two to three quarters. If it continues to underperform, exit this fund. And if your investment horizon is below three years, exiting from this fund and moving to debt funds would be prudent. 

I am a retiree and fall under the 30 per cent tax bracket. Would it be prudent to invest in an arbitrage fund?
- Ranjan Bhatia 

Amid markets turning turbulent, arbitrage funds have come to the forefront. The biggest boon of holding an arbitrage fund is that being a hybrid fund, its tax treatment is similar to equity funds. However, for most investors, they do not need investment in an arbitrage fund. Of late, we have seen some arbitrage funds generating better returns than debt funds, not to forget the added advantage of being treated as an equity investment and taxed accordingly. However, short duration funds are more than enough to actually take care of a retiree’s needs. That said, short duration funds are relatively more stable in the long run as well and hence can suit you even if you are a long-term conservative debt investor.

Indeed, arbitrage funds are pretty safe as they are structured in a manner of not engaging in equity risk. But at times there are situations when arbitrage opportunities don’t exist in a rangebound market. Therefore, in such a situation, the arbitrage fund will turn into a debt fund in case of no enough arbitrage opportunities. Hence, it is better to keep it simple. We would recommend not taking such tactical calls to try and optimise your return with such funds. Further, since you fall in the higher tax bracket, you can have some money dedicated towards arbitrage fund for a period of less than one year. But avoid investing all your money into just arbitrage funds.

 

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