I am a private sector employee, 43 years old, and with a good risk appetite. I have a general query. Often, it is recommended that investors ‘exit' a fund / Systematic Investment Plan (SIP) when a fund is consistently underperforming vis-à-vis its benchmark.

Please clarify what it means to: stop SIP and sell the fund (even booking loss); to stop SIP and wait for the fund Net Asset Value (NAV) to improve; stop SIP and switch to another better fund of that particular fund house or a different one.

I am asking this in the context of Reliance Regular Savings (which is not performing well) versus Reliance Equity Opportunities. I have SIPs in both.

— Prakash K, Kochi

We will first discuss your query on exiting funds or stopping SIPs. When you are asked to stop an SIP and sell a fund, you are entirely exiting the scheme.

This may typically be recommended when the fund has been underperforming its benchmark for several quarters or its return is far below that of peers (say 8-10 percentage points lower). But do make a note that while exiting these funds, the more recent instalments made through SIPs may not have completed their minimum six months or one-year holding period; in which case, you will suffer an exit load. But sometimes, this may have to be done to reduce the losses you may suffer by holding the fund.

Stopping an SIP and waiting for the fund to improve its performance simply means that you should avoid investing more in that fund. You should hold the existing investments and watch for improvement in performance. An advisor may resort to this recommendation when a fund, typically with a good performance record, suddenly underperforms its benchmark or peers during a six-month to one-year period.

REVIEW PERFORMANCE

A stop-SIP-and-hold approach may also be resorted to when a fund has changed its mandate or there is a change in fund management. So while performance may not be bad, some caution and review, at least for another six months, may be warranted before renewing SIPs.

Stopping an SIP and switching to another fund could mean two things. One, you divert the monthly instalment you made to another fund, from the existing fund. Or it may involve stopping SIPs, exiting the fund, and moving to another fund. Again, the reasons could be due to any of the two instances mentioned above.

As for your query on your fund holdings, we are assuming it is Reliance Regular Savings Equity Fund that you hold, and not the balanced fund. The two funds mentioned by you are not strictly comparable, as Reliance Equity Opportunities has higher exposure to mid and small-cap stocks compared with Regular Savings Equity. The former has, therefore, managed to return more, taking advantage of any sharp mid-cap rallies.

Having said that, it needs to be mentioned that Regular Savings Equity has a history of being highly volatile, with extraordinary gains in its best years, such as 2007, and also losing it as quickly. But its lower mid-cap exposure in recent times has meant being less volatile at the cost of giving up some returns. Still, over a three-year period, the risk-adjusted return, calculated through the Sharpe ratio, shows Reliance Equity Opportunities as a better fund. If you wish to own one of these two funds, and can take some mid-cap exposure, you may prefer Reliance Equity Opportunities. In such a case, exit Reliance Regular Savings Equity, and divert the proceeds as well as your monthly investments towards Reliance Equity Opportunities. But do note that Reliance Regular Savings Equity has an above-average performance in the multi-cap fund category. We hope you do hold a few other funds with a good performance record.

(The recommendations made in this column address the reader’s query, based on their risk profile and requirement and may hence not be applicable to all investors.)

(Queries may be e-mailed to >mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.)

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