After the markets correction in the past one month, should I delay redeeming some units from my equity funds?
—  Bhupesh Kumar

It’s very difficult to exactly time one’s entry and exit perfectly to coincide with the bottom and the peak of the market respectively. This is because equity markets are driven not only by various fundamental factors like economic growth, corporate profitability, etc., but also by the sentiments of its participants. Hence, it would be difficult to predict whether markets would be higher or lower over the immediate term. In case you have a liquidity requirement over the near term (say over the next three to six months), you should consider redeeming the units sooner than later.

Should I continue with mid-cap funds or move to large-cap equity funds as they can absorb market shocks?
— Amit Gajare

Mid-cap funds, as the name suggests, typically invest a bulk of their portfolios in small and midcap stocks (at least 65% to 70%) and the remainder can be allocated to large cap stocks and cash based on the investment mandate and the fund manager’s views. Mid and small cap companies tend to have potential for higher growth in business (revenues and profits) vs large companies but are relatively less researched by analysts and have therefore, as a segment, generated higher returns vis-a-vis large caps.

The small and mid-cap fund category has outperformed the large cap category by an annualised 2% over the past 10 years. Because these companies typically have a higher beta than large cap companies, they are more sensitive to economic slowdowns (both domestic & global) and are also prone to higher risks of failure. This leads to poor performance during market downturns and resulting in higher volatility for mid-cap funds. Hence during bear periods of 2000-01, 2008 and 2011 mid-cap funds have underperformed large caps by anywhere between 2.2% to 5.7% on an annualised basis.

Overall, small & mid-cap funds have the potential to enhance the return of an equity portfolio consisting of only large caps over the longer term but are suited for investors with at least a moderate risk appetite. Unless you can ‘time’ the entry and exit between large caps and mid-caps very well, you can stay invested in good mid-cap funds. You would also need to consider whether the overall proportion of mid-cap vs large cap funds in your portfolio is aligned to your risk appetite and investment objectives.

Given the volatility, is it better to go for ETFs because of lower cost structure?
— Rahul Mahawar

Choosing between ETFs and actively managed equity funds has little to do with the overall market volatility. ETFs tend to passively track underlying indices and hence carry lower expense ratios vs their actively managed counterparts. The alpha or excess return being generated by the average Indian large cap fund vs a large cap index has been reducing over the last few years hence making a case for investing in ETFs in the large cap space. Whereas, small and mid cap funds continue to generate fairly good alpha over the benchmark over the long-term (5 to 10 years) thereby making actively managed funds in this category a fairly good option.

If I go to a branch office of fund house and invest in SIP by giving ECS mandate, will that be treated as a direct investment with lower charges?
— Pankaj Maheshwari

While investing in a mutual fund scheme (either via SIP or other modes) typically the application form includes a section on the Investment & Payment details wherein one needs to mention the scheme name and select between the regular and direct plan options. If one wishes to invest in the direct plan, the option needs to be selected and / or mentioned. Further, one should mention ‘Direct’ under the ARN column of the form.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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