Prime Q&A: How to handle changes in fund recommendations?

Editor’s note: We are starting a new series of posts today. We plan to take REAL questions from customers and publish the question and our answer to it here for everyone’s benefit. We will choose only such questions where the answer would have a wide applicability. Nevertheless, please note that not every question and answer may apply to your specific situation. Caveat Emptor.

Question

Dear sir/madam,

I have a concern. Few years back, I was having DSP midcap fund in my portfolio (in significant amount) . Based on the then recommendation, I shifted from DSP midcap to Franklin Prima. During 2011-2014 DSP midcap was recommended which i promptly subscribed to. Now back to DSP midcap.

i am totally confused. It appears that performance is completely cyclical. what a normal investor like me should do? Some time back , I bought franklin smaller companies fund also. Now the recommendation is hold on both franklin Prima/smaller. Now I have many funds in my portfolio with “hold” rating.

Isn’t there a simple method to keep one or two funds without the chance of frequent changes. Also what do I do with the funds in in my portfolio with hold rating (significant amount) . I am really getting unnerved by so many changes and finding it difficult.

Answer

Hello sir,

We understand your concern. This is a real risk you need to deal with and it is especially very true in the mid and smallcap space. Not now, since the 1990s, not a single midcap fund has been able to stand tall for decades at a stretch. This is to do with 3 things:​

1.  Size of the fund and difficulty in deployment as well as exiting on time, in the mid and smallcap space given the liquidity constraints​
2. Wrong calls in in mid and small-cap stocks cause far higher damage to a midcap fund than wrong calls in the largecap space and the climbing back is very hard. Many fall by the way side.​
3. Every time Indian markets go through a correction, a new set of market fancied themes emerge. They can be retail, media, capital goods, hospitality, retailing or even chemicals. When this happens, if funds are unable to foresee (or were simply not lucky) to get this call right, even quality stocks they hold may simply lie without making any money in the next bull market. And again, the catch up becomes harder. 

Please note that what I said can be true of some multicap funds too. Quantum LT Value for instance is a classic case of losing too many opportunities to make returns by staying in cash. Now, the catch up becomes that much more harder, its good portfolio notwithstanding.  This is real and and there to stay unless even our midcap stocks grow to very large sizes (like the US market).  

You need to take note of the following:

1. Your strategy needs to be buy and hold equities – not necessarily buy and hold funds forever. In other words,periodic weeding out is necessary if you take a call to go with active funds. There is no escaping that. Please take time tor ead our article on this: https://www.primeinvestor.in/is-buy-and-hold-a-sound-strategy-for-mfs/
2. The important thing is to be able to distinguish whether somebody is suggesting exits to churn your portfolio to high commission products (I am afraid this is prevelant in some distribution channels) or the person suggesting this is keeping in mind only the performance of the fund. 
3. If someone asks you to buy a fund and asks you to sell it in less than a year (Unless it is due to some unforeseen event like credit default), then you have every reason to question the credibility of such advice.
4. If you are not conviced, nothing prevents you from holding the fund.
5. A very simple alternative to all this is – taking the index route. That essentially means there are no wrong calls by advisors nor by fund managers. But what you will be left with is market returns. You can still be satisfied with it and not look at the possible opportunity loss from active funds. 

At PrimeInvestor, please note the following calls we give and what they mean: ·       

• When we add a new fund, it does not mean the others are bad. If so, we would not have other funds in the list. What it means is this fund is also worthy of consideration and it can be used by new investors and we explain its suitability and how to use it in your portfolio. It is not a call to change whatever fund you hold. For eg, in our change, DSP Midcap need not be a buy for EVERY investor. It is an option for somebody considering fresh investments, If they don’t already hold other quality midcap funds. ·       
• When we give a hold, we mean hold the fund and avoid further exposure. We even say  what to do with your SIPs. A hold simply means we are concerned a bit about performance and are watching it but the fund is not terrible enough to warrant a sell. In your query, Franklin India Prima is a hold. We have also clearly mentioned what you need to do when it is a hold.​
• We look at several quarters of performance, the reason for underperformance and the portfolio make up before suggesting exits. When our MF review tool gives a sell, then we are clear its performance is bad. the sell call can be executed by you based on your own tax treatment. For eg Franklin India Prima is NOT a sell in our tool, as you will see. You can use our tool every quarter or even half year to check your funds. 

In our earlier experience, our recommended portfolios undergo small changes with time. We do not feel the need to churn often as long as the fund stays true to its strategy and is consistent, even if not top notch. 

I would request you to simply follow the above rules and there would be less to be worried about 🙂 ​

Thanks!