The issue of overlap

By Morningstar |  20-02-20 | 

While we suggest that readers employ the services of a financial adviser, here are some broad guidelines.

You can post your query by accessing the Ask Morningstar tab. Our team will endeavor to answer queries ONLY related to mutual funds and portfolio planning from our registered readers.

My funds are:

  1. Axis Bluechip
  2. Axis Midcap
  3. Axis Long Term Equity
  4. Axis Small Cap
  5. Axis Multicap
  6. Axis Focused 25
  7. HDFC Small Cap
  8. HDFC Tax Saver
  9. SBI Magnum Tax Saver

Are these too many funds? Are these sufficient for wealth creation in 20 years? Since I believe in these funds houses, I stick to them. Is that ok?

- Bhim Singh

You’ve invested only in Axis and HDFC funds in addition to SBI Taxsaver.

Some of the funds mentioned have been analysed by our team. You can see it here: HDFC Small Cap, HDFC Tax Saver, SBI Magnum Long Term Equity (ELSS), Axis Long Term Equity, Axis Focused 25

All of the funds that you have invested in stand out at an individual level. However, we urge you to look a the overlap in the portfolio holdings across these funds.

For example, you currently hold the Axis Long Term Equity as well as the Axis Focused 25 funds which are managed by the same fund manager and share a significant overlap with each other. Similarly the Axis Multicap and Midcap are also managed by the same manager and share overlap especially in the large cap segment of the portfolio.

It’s also important to look at the styles of an individual manager and diversify across them. For instance, Axis funds typically invest in stocks with a quality and growth bent. HDFC on the other had are more valuation conscious when it comes to selecting stocks. By investing in multiple funds from the same fund house, you risk losing out on performance when a particular style is not in vogue. For example, when the market favors value over growth, Axis funds would likely underperform.

 I am 30 years old, working in IT company. My child is newly born.

My SIPs:

  1. ABSL Frontline: 6,000
  2. ABSL Tax Relief 96: 4,200
  3. Mirae Asset: 10,000
  4. SBI Small Cap: 5,000
  5. Axis Short Term: 5,000

I am thinking about replacing ABSL Frontline with Axis Focused 25 with a sip of 10,000. I have accumulated Rs 14 lakh (9 lakh equity, 5 lakh debt fund) till now. Could you please provide your insights on my fund selection. I would like My goals are Retirement (2 crores) and child education (1 crore).

- Ram

The funds in your portfolio are good, there is no specific need for a change. Given that you have a long term investment horizon, if your risk appetite permits, you can increase your exposure in small & mid cap funds cumulatively to 30% of your overall portfolio. You can find a list of highly rated funds here.

We would advise to continue with your investment in ABSL Frontline Equity. Manager Mahesh Patil has consistently managed the fund by investing with a Growth At a Reasonable Price (GARP) strategy. Currently due to the polarization in the market only a certain section of quality stocks which are trading at high valuations are driving returns, which has impacted his returns on a relative basis, we expect the strategy to do well over a market cycle.

Axis Focused 25 is a well managed fund that invests into quality stocks and doesn’t mind paying a premium for these stocks (which is exactly the segment of the market that has done well since 2018) which translates into the superlative returns.

Assuming you need Rs 1 crore for your child’s education in 18 years from now and another Rs 2 crore for your retirement, you should be looking to increase your SIP amounts by 10% yearly to build in adequate buffers. Also consider that Rs 2 crores 20 years from now is not the same as Rs 2 crores today, you need to factor in inflation when calculating a comfortable retirement corpus. (at 5% inflation, the present value of Rs Rs 2 crores in 20 years is approximately Rs 75 lakhs in today's terms).

I'm 34 years old, My portfolio SIPs:

  • Axis Bluechip fund: Rs 2,000
  • Mirae Asset Bluechip: Rs 2,000
  • Kotak Standard Multicap: Rs 2,000
  • Kotak Balance Advantage: Rs 2,000
  • SBI Small Cap: Rs 2,000
  • SBI Banking & Financial Services: Rs 2,000
- Uttam

The funds in your list are all well managed strategies with different mandates.

Axis Bluechip is a large-cap fund and has been consistently beating most of its peers by a fair margin. It makes sense in investing in large cap companies as they provide a greater stability in times of economic slowdown given their dominant market share.

Mirae Asset Bluechip traditionally a mid-cap oriented fund, is positioned as a large and mid cap fund post SEBI categorisation. The fund has displayed above average returns on all time frames and we have a high conviction on the fund manager – Neelesh Surana.

Kotak Standard Multicap is managed by Harsha Upadhyaya and has been running with a predominant focus on large-cap companies. Upadhyaya is a very efficient stock-picker and has executed this strategy with a lot of finesse.

Kotak Balance Advantage is from the Dynamic Asset Allocation and a relatively new in terms of its history. However, over the last one-year period the fund’s performance was exceptionally good.

SBI Small Cap fund invests at least 65% of its net assets in small-cap stocks. The fund is managed by R Srinivasan and he is known to identify good quality small cap companies. Small-cap stocks are excellent wealth creators over the long term, but also can be quite volatile in the short term. But if you have a long term horizon, small cap funds can serve you well. If these funds meet your investment objective and is a fit in your portfolio, then you may consider holding on to it.

SBI Banking and Financial Services is a sector fund. We typically are not big advocates of Sector/Thematic funds. We believe a portfolio of good diversified funds does a pretty good job of creating wealth. Managers will anyways take their active calls on sectors/themes which they believe will be the growth drivers going forward.

You can look at our analyst views here.

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