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I have been investing since 2012 in ICICI Pru Value Discovery Fund through SIPs. The recent performance has been poor. Can you suggest another fund? My other SIPs are in Franklin Prima Plus, Mirae Asset Emerging Bluechip and HDFC Mid-cap Opportunities. My time horizon is until 2025.

Ram

In the last one year, ICICI Pru Value Discovery has earned about 10.5 per cent returns while its benchmark, the BSE 500 index, sports a much higher gain of 17.9 per cent. Its one-year SIP return of around 12 per cent is also lower than that of most other peers in the multi-cap funds category.

You are hence right in saying that the recent performance has not been up to the mark. But we suggest that you continue investing in the fund. One year is too short a timeframe to judge the potential of a fund. A fund may underperform in the short period due to certain long-term calls it has taken with regard to its stock and sector choices, which may pay off later on.

ICICI Pru Value Discovery’s multi-cap approach implies that it has the flexibility to take greater exposure to mid- and small-cap stocks at one point in time and stick with large-caps at other times.

Besides, as the name goes, the fund follows a value strategy which means that it could favour beaten down stocks and sectors or those with relatively lower valuations, which have the potential to re-rate over the medium to long term.

Thanks to the bullish sentiment since 2014, valuations of mid- and small-cap stocks have moved up sharply. Hence, the fund has gradually reduced holdings in this segment, finding greater value in large-caps.

While in January 2016, the fund held about 22 per cent of its equity portfolio in mid- and small-cap stocks, it came down to 9 per cent by December 2016. It has held less than 10 per cent of its equity allocations in mid- and small-cap stocks since then.

However, mid- and small-cap stocks have continued to outperform, with the BSE MidCap and BSE SmallCap indices showing returns of 16-23 per cent in the last one year as against the Sensex’s 13 per cent.

This apart, true to its value bias, the fund has also increased its exposure to out-of-favour sectors such as IT and pharma, whose stocks have taken a beating. Hence, the fund’s performance has been sub-par.

Though mid- and small-cap stocks have had a good run so far, they may be up for some correction sooner than later, considering their high valuations. The BSE MidCap and SmallCap indices now trade at a trailing 12 –month PE of 30 times and 77.8 times respectively, compared with the Sensex’s 23.7 times.

Since the market is at a peak now, the fund’s focus on large-cap stocks may come in handy in case of bearish sentiment or volatility from now on. Large-caps generally help contain downside better in such markets.

ICICI Pru Value Discovery has a good track record of cutting losses better than the benchmark in bearish markets such as 2011 or the volatile markets of 2013/15. Over time, IT and pharma segments too may regain their mojo, lifting the fund’s performance.

Hence, since you are a long-term investor with a time horizon up to 2025, you need not stop SIPs in this fund as of now. You can keep a close watch over the next one to two years for prolonged underperformance, if any, and then take a call.

Your other funds are top-of-the-class performers and you can continue the SIPs for the foreseeable future. Your choices show a higher risk appetite. While Pru Value Discovery is a multi-cap fund, Franklin Prima Plus is large-cap oriented, with reasonable exposure to mid- and small-cap stocks.

The other two — HDFC Mid-cap Opportunities and Mirae Emerging Bluechip — are mid-cap funds. If you wish to moderate your risk, you can consider adding a large-cap fund such as SBI Magnum Equity.

Send your queries to mf@thehindu.co.in

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