I am a senior citizen aged 74 and a small investor in mutual funds. I find that Magnum funds such as Magnum Balanced and Contra are underperforming for the last two years vis-à-vis their respective benchmark indices. It would be good to know what future course of action needs to be taken.

R.L. Gaur

Mandi, Himachal Pradesh

Your observation of both the funds is correct. Let us first look at Magnum Contra. Over a three-year period, the fund has delivered a poor 5.4 per cent compounded annually. The five-year return too is below par, with the fund just about managing 11 per cent per annum. Magnum Contra was among the superior performers till the 2007 bull market and did resort to contrarian stock and sector choices, a good number of such calls delivering well. It is noteworthy that the ‘contra' theme in the first place requires a buy and hold approach for not less than two years. This is because contrarian funds seek to invest in undervalued, out of favour stocks or sectors that are expected to turnaround in the medium term. Hence, it may take a while for contrarian funds to perform. Contra funds as a universe have underperformed, barring a couple of funds.

This can be attributed partly to the polarisation of themes in the stock markets post the correction. While the consumption themes were lifted higher, the investment themes such as capital goods and infrastructure were completely neglected. Hence a contrarian bet on the latter would not have yielded benefits, despite low valuations even after adopting a wait and watch approach for as many as three years.

Having said this, the above arguments cannot be used to defend the poor performance of Magnum contra. For one, the fund has for quite some time now shed its contrarian image. Financials and FMCG account for a good chunk of the portfolio like most other diversified funds. While financials could be said to be contrarian to some extent as they have been out of favour for over 6 months now, FMCG stocks have been the market's favourite ‘growth' theme.

Two, while the theme has underperformed in general, peers such as Religare Contra and Tata Contra have showcased far superior performance. Religare Contra for instance managed a 14-percent annual return in the last three years, a good 9 percentage points higher than Magnum Contra. In general, underperformance by a contra fund for over 2-3 years need not be tolerated as it could imply that the contrarian call simply went wrong.

Failing to contain downside

Magnum Balanced too has been a mediocre performer. While the fund has shown inspiring performance in rallying markets, it is evident that its does not repeat such performance in a volatile market. You have very little reason to hold a balanced fund that has fallen more than the equity-fund average. After all, the idea of holding a balanced fund is to contain downside risks. In general most of the Magnum equity funds, except Magnum Emerging Business have not done too well post the 2008 market correction. The debt funds have performed better. You can consider exiting both these funds. If you still wish to hold equities, you can go for HDFC Top 200 in the above funds' place.

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I have just begun my career and want to invest in large-cap stocks such as SBI, ICICI Bank, Infosys, TCS, L&T & Reliance Industries. Can you mention the funds which have exposure to these stocks? I prefer to invest through the SIP route. I can invest only Rs 500 per month as I am also investing in mid and small-cap stocks directly.

Thomas Mathew

It is a good idea to invest in blue chips when you kick-start your investment. Any number of funds will hold the stocks mentioned by you. HDFC Top 200 is a good fund to hold if you wish to have a blue-chip fund. Having said this, we feel your strategy of investing in blue-chips through funds and taking exposure to mid and small-cap stocks directly may be not be an ideal one, especially if you are new to stock markets.

While blue chips can always be bought directly, as the risk of burning one's fingers (if the holding period is long) is minimal, small and mid-cap stocks come with high risks. These risks may be better managed by a good fund manager than by individuals.

While not wanting to deprive you of the thrill of investing in small caps, we suggest that you keep your direct exposure to this market-cap segment limited if you lack the time to monitor them. You may invest some portion through SIPs in mid-cap funds such as IDFC Premier Equity or HDFC Mid-Cap Opportunities.

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