I have been investing in large-, mid-, small- and multi-cap equity funds for the past few years. Now my wife wants to start investing and we are considering multi-cap funds.

In your earlier reviews, you have recommended a few multi-cap funds such as Tata Equity PE Fund, Birla Advantage and ICICI Pru Multicap. Can you suggest two multi-cap funds for our portfolio? Our time horizon is 7-10 years and the only goal is to maximise the return on investment.

We have a high risk appetite. I have invested in Franklin High Growth Companies. Kindly suggest other funds.

Ashish Pathak

A multi-cap fund is indeed a good fit for a first-time investor in equity funds. It is also an excellent option if you have a long-term horizon and don’t want to manage allocations between large-, mid- and small-cap stocks actively. Franklin India High Growth Companies is a good option in this space. The fund invests in a universe of companies, across the market cap range that can deliver strong earnings growth.

If you are looking for diversification for your wife’s portfolio, you could choose from Birla Sun Life Advantage Fund and ICICI Pru Multicap Fund, which have a good long-term track record. As you classify yourself as a high-return seeking aggressive investor, you must also consider any ETF tracking the Nifty Next50 (erstwhile Junior Nifty), as the index features a mix of large and emerging large-cap stocks. The Reliance ETF Junior BEES has proved a difficult fund to beat over 3-, 5- and 10-year time frames.

I have an investment in IDFC Premier Equity Fund, accumulated via a Systematic Investment Plan until 2015. The performance of the fund has not been good over the past three years. Should I exit the investment and move to a better performing fund? What are the alternatives to this fund?

Rasesh Choksi

Yes, the performance of IDFC Premier Equity, at one time a top choice in the mid-cap category, has slipped sharply in the last two years. While the fund has underperformed its benchmark only in one of the last 10 years (2016), it has chronically underperformed the mid-cap category in the last three years. Ironically, this has been an excellent time for mid-cap stocks as an asset class. As of June 1, 2017, the fund’s one-year return, at 18 per cent, trailed both the benchmark (22.8 per cent) and the category (29.7 per cent). Its three-year return of 18.5 per cent beat the benchmark (12.8 per cent) but sharply lagged the category (22.9 per cent). Its five-year returns at 17.5 per cent were again ahead of the benchmark (10.3 per cent) but fell behind peers (25.2 per cent). Essentially, you are making a reasonable absolute return by owning the fund. But owning it entails an opportunity cost as you are missing out on much better performers.

The fund’s poor show in the last two years can be traced directly to its aggressive call of maintaining negligible weights in the financial sector, in contrast to its benchmark and peers. Taking the view that the earnings rebound and economic recovery would take a long time, the fund avoided banks and value-oriented stocks.

With both banks and beaten-down value names such as oil/gas/metals running up sharply in the last year, the fund’s performance has taken a big hit. However, with the fund’s erstwhile manager Kenneth Andrade exiting and Anoop Bhaskar, a good mid-cap manager, taking over in February 2016, a course-correction is presently under way. This offers hope for improvement in future.

We usually recommend exiting a fund if it underperforms its benchmark for two years running. You can hold on to IDFC Premier Equity if it is a 10 per cent or lower exposure in your portfolio. But if this is the only fund you own, you should consider a switch to a better performing mid-cap fund. We recommend Mirae Asset Emerging Bluechip and HDFC Midcap Opportunities as alternatives.

Send your queries to mf@thehindu.co.in

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