Mutual fund portfolio in loss after 20 months? Expert says don’t judge too early, tweak allocation

Short-term losses in mutual fund investments can make investors anxious, especially during volatile market phases. However, judging equity investments over a brief period may lead to misleading conclusions. A better understanding of market cycles and selecting appropriate fund categories are essential for long-term wealth creation.

A similar query came from Bhavana Chaudhary who has been investing through SIPs in funds of only one AMC - SBI Mutual Fund. She invests in SBI Contra Fund (Rs 2,000) and SBI Small Cap Index 250 Fund (Rs 4,000). After 20 months of investing, her portfolio is currently showing a loss of around Rs 10,000, prompting her to seek guidance on what to do next.

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According to Pankaj Mathpal, the first thing investors must understand is that volatility is inherent to equity markets. Since Bhavana has been investing for less than two years, her investment horizon is too short to judge performance. Equity investments typically require a minimum time horizon of five years to deliver meaningful returns, as they benefit from rupee cost averaging over time.

Another key issue in her portfolio is the choice of funds. While the allocation to a contra fund is acceptable, a significant portion invested in a smallcap fund at the beginning may not have been ideal. Smallcap funds tend to be more volatile and are generally better suited for experienced investors or those with a higher risk appetite and longer investment horizon.

“I am not recommending smallcap, midcap, I am recommending flexicap and multicap so that at least during volatility your portfolio is less impacted. So, here she invested in contra fund Rs 2000 and Rs 4000 she invested in smallcap fund though she should have not started with smallcap,” Mathpal said.

To address this, the expert suggests continuing the SIP in the contra fund but reconsidering the small-cap exposure. Instead of continuing with the small-cap fund, Bhavana can redirect her Rs 4,000 SIP into a flexi-cap fund such as ICICI Prudential Flexi Cap Fund. Flexicap funds invest across largecap, midcap, and smallcap stocks, offering better diversification and relatively lower volatility.

The expert further said that she should invest in a flexicap fund and that will be ICICI Prudential Flexicap Fund stating that he did not want to recommend her two schemes from the same AMC. So, contra fund will be from SBI and flexicap fund from ICICI Prudential Mutual Fund.

Additionally, even though the smallcap investment is currently in loss, the expert recommends switching the accumulated amount from the small-cap fund into the flexicap fund. This move can help stabilise the portfolio while still maintaining equity exposure.

She will get exposure to multiple asset classes, multiple market caps, hence that strategy should be followed, Mathpal further said.

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The broader takeaway for investors by Mathpal is to start with relatively stable categories such as flexicap, multicap, balanced advantage, or multi-asset funds. These categories provide diversification and help manage volatility better during the initial years of investing. Exposure to mid-cap and small-cap funds can be added gradually as the portfolio matures and the investor becomes more comfortable with market fluctuations.

In essence, short-term losses are not uncommon in equity investing. Staying invested with the right asset allocation and a long-term perspective is key to achieving financial goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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