Negative Returns on PSU Equity Fund: Should I Stop Investing?

Ans: Hello Vikas. If you are investing for long run say 7-10 years. I would recommend to reconsider both mentioned schemes to better peer schemes. You may consider multicap and mid cap categories for your portfolio.

Ans: Sectoral funds are riskier. You may have to wait for a longer tenure for it to recover in general. That's why diversified equity funds are suggested for investors. In diversified equity funds, the fund manager will decide when to enter into a particular sector and when to exit from a particular sector.

Ans: You have been investing in an SBI contra fund for the past six months. Now, you are considering switching to an SBI PSU fund. Let’s evaluate this decision based on your future return expectations, risk tolerance, and investment horizon.

Understanding the Nature of Contra Funds
Contra Funds:
Contra funds follow a contrarian investment strategy. This means they invest in stocks that are undervalued or overlooked by the market. Over time, these undervalued stocks can deliver significant returns as they gain market attention and their true value is realized.

Key Advantages:

Potential for high returns when the market corrects itself.
Investment in undervalued stocks that others may ignore.
Often perform well in market downturns, as they are less likely to be overvalued.
Key Risks:

Requires a longer time horizon for returns to materialize.
Market may continue to overlook these stocks, leading to extended periods of underperformance.
Performance is highly dependent on the accuracy of the fund manager’s stock selection.
Given these factors, contra funds are generally suited for investors with a higher risk tolerance and a longer investment horizon. If you fit this profile, continuing with a contra fund could be beneficial.

Understanding the Nature of PSU Funds
PSU Funds:
PSU (Public Sector Undertaking) funds invest primarily in stocks of government-owned companies. These funds are focused on sectors like banking, energy, and infrastructure. PSU funds are often considered more stable due to government backing, but they come with their own set of challenges.

Key Advantages:

Exposure to companies with strong government backing.
Potential for steady, if not spectacular, returns over time.
Often provide good dividend yields, which can add to overall returns.
Key Risks:

Limited growth potential, as many PSUs are in mature industries.
Performance is closely tied to government policies and economic conditions.
Sector concentration risk, as PSU funds are heavily focused on specific sectors like energy and banking.
If you prefer a more stable investment with government backing and are willing to accept lower growth potential, PSU funds may align with your goals. However, this switch would likely reduce the potential for higher returns that contra funds offer.

Assessing Your Decision to Switch
Switching from a contra fund to a PSU fund is a significant change in your investment strategy. It’s important to consider the following factors before making this decision:

Investment Horizon:

Short-Term: If you have a short-term investment horizon, PSU funds may provide more stability. However, they may not offer the high returns that contra funds could deliver over time.

Long-Term: If you are investing for the long term, contra funds may be a better option. They have the potential to outperform over time as undervalued stocks correct and appreciate in value.

Risk Tolerance:

Higher Risk Tolerance: If you are comfortable with higher risk and can tolerate short-term volatility, staying with the contra fund could be beneficial. Contra funds require patience, but they can deliver significant returns in the long run.

Lower Risk Tolerance: If you prefer a more conservative approach and are looking for steady, reliable returns, switching to a PSU fund could be appropriate. However, be prepared for potentially lower overall returns compared to a contra fund.

Market Conditions:

Current Market Outlook: Contra funds perform well in market corrections, where undervalued stocks gain value. If you believe that the market is due for a correction, staying in a contra fund could be advantageous.

Economic and Government Policies: PSU funds are influenced by government policies. If you expect favorable policies towards PSUs, investing in a PSU fund could be beneficial.

The Case Against Index Funds
You mentioned switching between specific funds, but it's important to note that many investors consider index funds as an alternative. However, index funds have certain drawbacks:

Lack of Flexibility:

Index funds are passive investments, which means they simply track the market index. They do not have the flexibility to outperform the market or adjust based on market conditions.
Lower Return Potential:

Because index funds only match market performance, they do not offer the opportunity to outperform the market. Actively managed funds, like contra or PSU funds, can provide higher returns if managed well.
Risk During Market Downturns:

Index funds mirror market movements. If the market declines, your investment will follow. Actively managed funds can adjust their holdings to mitigate losses, which is not possible with index funds.
Given these factors, actively managed funds, whether contra or PSU, may offer better opportunities for growth and risk management.

The Benefits of Regular Funds Through a Certified Financial Planner
You might also consider the difference between direct and regular funds. Direct funds allow you to invest directly without any intermediary. However, this option has its disadvantages:

Lack of Professional Guidance:

Direct funds do not offer the benefit of professional advice. This can lead to suboptimal investment decisions, especially in a complex market.
Complexity in Management:

Managing your investments without professional help can be time-consuming and challenging. Regular funds, managed by a Certified Financial Planner, ensure that your investments are aligned with your goals and risk tolerance.
Access to Expertise:

A Certified Financial Planner provides valuable insights and strategies that can optimize your investment portfolio. This can lead to better returns and more effective risk management.
Recommendation:
Investing in regular funds through a Certified Financial Planner can provide the guidance you need to make informed decisions. This approach helps you navigate market complexities and achieve your financial goals more effectively.

Portfolio Diversification and Rebalancing
Whether you choose to stay with the contra fund or switch to the PSU fund, diversification and regular portfolio rebalancing are essential.

Diversification:

Spread your investments across different sectors and asset classes. This reduces risk and enhances the potential for returns. For example, while you may have a preference for PSU or contra funds, consider also investing in other sectors or hybrid funds.
Rebalancing:

Regularly review and rebalance your portfolio. This ensures that your investments stay aligned with your risk tolerance and financial goals. If one fund performs significantly better or worse, rebalancing helps maintain your desired asset allocation.
Recommendation:
Work with a Certified Financial Planner to diversify and rebalance your portfolio regularly. This approach ensures that your investments remain aligned with your goals and can adapt to changing market conditions.

Final Insights
Your decision to switch from an SBI contra fund to an SBI PSU fund should be based on your investment goals, risk tolerance, and time horizon. Here’s a summary of the considerations:

Contra Funds: Suitable for long-term growth with higher risk tolerance. Requires patience but can deliver significant returns.

PSU Funds: Offers stability with government backing but may have lower growth potential. Suitable for conservative investors.

Active Management: Actively managed funds can outperform the market, offering better returns and risk management compared to index funds.

Professional Guidance: Regular funds managed through a Certified Financial Planner provide valuable expertise, helping you make informed investment decisions.

Diversification and Rebalancing: Essential for managing risk and ensuring your portfolio stays aligned with your goals.

In conclusion, consider your personal financial situation and consult with a Certified Financial Planner before making any changes. This will help you make a well-informed decision that aligns with your long-term financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Public Sector Undertaking (PSU) funds can sometimes show volatility, especially in the short term. Since you’ve noticed negative returns from your Rs. 10,000 investment, it’s understandable to feel concerned. Let’s break down the situation to help you decide whether to stop or reduce your Systematic Investment Plan (SIP) in PSU funds.

Long-Term Nature of PSU Investments
First, it’s important to appreciate that PSU funds are typically more volatile because they are heavily influenced by government policies, economic cycles, and sector-specific challenges. These funds are not known for consistent short-term returns but are better suited for long-term investors who are patient.

If your investment horizon is more than five years, you might still see recovery and positive returns as PSUs tend to perform well in certain market phases. If you reduce or stop your investment now, you may miss out on potential future gains. So, patience can be rewarding here.

Negative Returns: Short-Term Market Fluctuations or a Deeper Concern?
It is quite common to see negative returns during volatile periods. However, negative returns do not always indicate poor fund performance. The market as a whole might be going through a down phase, and PSUs tend to react more dramatically. It’s critical to evaluate the following factors before making any decisions:

Fund’s Track Record: How has the fund performed in the past, particularly over 3, 5, or 7 years? If its long-term performance is strong, then short-term negative returns are not necessarily a red flag.

Sector Outlook: Are there any changes in the sector or government policies that could impact PSU stocks? A sectoral slowdown or specific challenges for PSUs may result in underperformance for the time being.

Your Investment Horizon: If your financial goals are far off, it may make sense to continue your SIP and ride out the market fluctuations. However, if you need the money sooner, reducing your exposure could be worth considering.

Consider Diversification Over Complete Exit
If the volatility in PSU funds is a concern, you don’t need to stop investing entirely. Instead, reducing your SIP amount from Rs. 10,000 to Rs. 5,000 can be a more balanced approach. This strategy allows you to keep some exposure to PSU funds, which could benefit from sectoral rebounds in the future, while freeing up money for other more stable investments.

Reducing the SIP amount can give you peace of mind while maintaining long-term potential in your portfolio.

Benefits of Actively Managed Funds
Rather than focusing solely on PSU funds, you may want to allocate part of your investment to actively managed funds. Unlike index funds or ETFs, actively managed funds have professionals making informed decisions about which stocks to buy and sell. This gives you the benefit of market insights and adjustments based on performance. It can help stabilize your returns, as these funds are often more diversified across various sectors.

This diversification lowers the risk of overexposure to a single sector, such as PSUs. By spreading your investment across multiple sectors through actively managed funds, you can improve your portfolio’s balance.

Avoiding Index Funds and Direct Mutual Funds
It is important to understand that index funds, though cheaper, are not always the best option. They simply mimic the index and lack the flexibility to shift when market conditions change. This can expose you to more risk, especially when sectors like PSUs face challenges.

Direct mutual funds might seem like a good choice to save on commissions, but they often require extensive market knowledge. For most investors, it is better to work with a Mutual Fund Distributor (MFD) who has a Certified Financial Planner (CFP) credential. They can help you select funds that align with your financial goals and risk profile.

Alternatives for More Stability
If PSU funds are causing too much concern, you could consider reallocating part of your investment to funds with more stable returns. For example:

Balanced Advantage Funds: These funds automatically shift between equity and debt based on market conditions. They can offer a more balanced risk-return profile, making them less volatile compared to PSU-focused funds.

Debt Funds: For those who want to focus on stability, debt funds offer consistent returns with lower risk. They are a good way to generate steady income while reducing exposure to volatile sectors.

By reallocating some of your SIP into more balanced or debt-oriented funds, you can manage your risk more effectively without exiting the market altogether.

Regular Review of Your Portfolio
It’s essential to periodically review your portfolio and see how different funds are performing. While PSU funds might not be delivering now, regular assessment with the help of a Certified Financial Planner can provide you with insights on whether to hold, switch, or reduce your investments.

If the overall performance of your portfolio is aligned with your long-term goals, a short-term dip in PSU fund performance might not be a reason to panic. Staying invested through market cycles is often the best way to grow wealth over time.

Final Insights
In summary, your investment in PSU funds might be showing negative returns now, but that doesn’t necessarily mean it’s time to exit entirely. Here’s a quick action plan:

Evaluate the Fund’s Long-Term Performance: Don’t make decisions based on short-term dips. Look at the track record and sector outlook.

Consider Reducing, Not Stopping: Reduce your SIP to Rs. 5,000 rather than stopping entirely. This keeps you invested while freeing up money for other options.

Diversify Into Actively Managed Funds: Use part of your investment in actively managed funds for more stability and potential growth. Avoid direct mutual funds and index funds due to their limitations.

Reallocate to More Stable Funds: Consider adding balanced advantage or debt funds to reduce volatility.

Review Regularly: Keep assessing your portfolio’s performance with a CFP to stay on track.

By following these steps, you can make a more informed decision about whether to continue, reduce, or stop your SIP in PSU funds.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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