I’ve been holding onto some mutual funds for exactly one year now. Most of my portfolio has performed fantastically well, but I’m questioning whether to sell one underperforming fund.
In July 2023, I bought HSBC Small Cap and HDFC Small Cap mutual funds. Their returns over the past year are:
HSBC Small Cap: 60%
HDFC Small Cap: 44%
While these returns are good, they don’t stand out in the broader small-cap mutual fund market. HSBC decently well, barely placing in the top quartile among its peers. However, HDFC was the third worst-performing small-cap fund in the entire market over the same period. Here’s a comparison with other small-cap mutual funds:
Quant Small Cap: 69%
Nippon India Small Cap: 61%
ITI Small Cap: 73%
Bandhan Small Cap: 76%
LIC MF Small Cap Fund: 60%
Invesco India Small Cap Fund: 59%
Franklin India Smaller Cos Fund: 62%
When I initially invested, HDFC was a top-quartile fund based on a 3-year CAGR. However, its performance over the last year has significantly lagged behind its peers, affecting its overall standing.
Decision Dilemma: Sell or Hold?
Given the situation, I’m contemplating whether to sell or hold HDFC Small Cap. For me, mutual funds are about generating alpha, not just profits. If the Index is going up, it’s almost hard to lose money if you’re investing responsibly. However, poor investments can cause you to miss out on more alpha.
So, should I sell HDFC Small Cap to avoid further underperformance, or hold on in hopes of a recovery? I have been holding this for only a 1 year period so while LTCG at 10% will apply to me.
Hello. (Yes, me again). Quick follow up on this, I have seen some Investment advisory and PMS services who do engage in Short to Medium term churn/rebalancing* of Mutual Funds, almost like trading them. One of these wealth managers was telling me how they would analyse the holdings within the Mutual Funds to ensure there isn’t too much overlap while also trying to maximise returns based on factors like PE of the fund.
This almost sounds like Mutual Fund Trading to me? and mostly a bad idea.
So when exactly is a good time to rebalance your MF portfolio and get rid of the under performers? It definitely isn’t 1 month, but also not 10 years.
NB: I find it funny how churn/rebalancing are the same thing, yet somehow one has a negative connotation and the other has a positive one.
I get your point about Rebalancing MF is like changing lanes in traffic, but similar to that analogy, when your lane isn’t moving for too long and all others are, perhaps it does make sense to move over to another lane right? You do need to rebalance your portfolio but what is the right timeline for this? - I know it isn’t 1 month but also not 10 years. A 25% underperformance compared to peers (if peer gets 100, you get 75), could have a major impact on the compounding.
You should ideally compare 5-year trailing returns rather than just 1 year absolute.
In this case - you are right - HSBC and HDFC are not in the top percentile of small cap funds even for 5-year trailing returns.
You should consult with your MF distributor and try to shift to a better fund in a tax efficient manner.
Below are the top percentile funds:
Quant Small Cap Gr
Bank of India Small Cap Reg Gr
Nippon India Small Cap Gr Gr
Canara Robeco Small Cap Reg Gr
Edelweiss Small Cap Reg Gr
Tata Small Cap Reg Gr
Kotak -Small Cap Gr
Disclaimer: not a recommendation to buy any of these
(Source: advisorkhoj)
The thing with 5-year trailing is that there seem to be a lot of funds that aren’t that old. In the small case category, only 19 funds are older than 5 years. A lot of the out performers from the last year like ITI, Mahindra Manulife and Bandhan are less than 5 years old. These gave 73%, 71% and 76% respectively in the last year!