Should I Remove My Principal Amount From Canara Robeco Small Cap Fund?

Ans: It’s impressive to see a 102% absolute return and an XIRR of 23% over three years—these are strong returns, especially in a small-cap fund. Here’s a thorough assessment to guide your next steps.

1. Understanding Short-Term Volatility in Small-Cap Funds
Small-cap funds are inherently more volatile than large- or mid-cap funds. After a period of high performance, it’s common to see some corrections as market cycles change. Small-cap funds are especially prone to volatility, reacting quickly to market sentiments, economic changes, and sector-specific trends. However, this does not necessarily mean the fund’s long-term growth potential is diminished.

2. Reviewing the Fund’s 3-Year vs. 5-Year Performance
You mentioned that the fund’s 3-year returns outperform its 5-year returns. This is sometimes the case in small-cap funds, where certain periods of high growth skew short-term results. However, the five-year returns often smooth out short-term volatility, providing a clearer picture of the fund’s average performance. Moving out solely because of recent underperformance may lead to missing potential future gains as markets recover.

3. Assessing Your Financial Goals and Horizon
At 28 years old, you likely have a long investment horizon, which generally supports staying invested in equity-focused options like small-cap funds.

Investment Horizon: If your goal is more than 5 years away, staying invested may allow the fund to recover from short-term volatility and deliver stronger returns over time.

Risk Tolerance: Small-cap funds require a high-risk tolerance, as they can experience significant fluctuations. If you’re uncomfortable with this volatility, consider gradually reallocating some funds into less volatile categories, such as large-cap or flexi-cap funds, for more stability.

4. Advantages of Staying Invested in Small Cap
Compounding Growth: Staying invested allows for the power of compounding to work in your favour, especially as market recoveries can significantly boost small-cap funds.

Long-Term Growth Potential: Small caps are generally positioned for higher growth over the long term, which aligns with your age and investment horizon.

5. Alternatives to Consider if Rebalancing
If you’re still inclined to partially withdraw, consider these options instead of a full exit:

Partial Profit Booking: You could withdraw only the profit portion, keeping the principal invested. This approach locks in gains while allowing the remaining amount to benefit from future growth.

Diversifying to a Balanced Fund: Moving some funds into a balanced or large-cap fund offers more stability. Large-cap funds focus on well-established companies and tend to be less volatile.

Investing Through a Certified Financial Planner (CFP): Regular funds managed with CFP guidance provide professional oversight, helping you navigate volatile markets. Direct funds may appear cost-effective but lack ongoing professional input, which is critical for a well-rounded portfolio.

6. Final Insights
Given your age and the fund’s long-term growth potential, a complete exit may not be necessary. Small-cap funds can deliver strong returns if held for a longer term, and short-term volatility is typical for such funds.

However, partial profit booking or rebalancing into more stable funds could offer peace of mind without sacrificing growth opportunities. Consider these steps and consult a Certified Financial Planner for personalised guidance to ensure alignment with your goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment