Why is my Axis Small Cap Fund performing so well?

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Ans: mutual funds performance is linked to their stock holdings and that effects their performance.

Ans: Investing in small-cap funds like Axis Small Cap and Nippon Small Cap can offer high growth potential but come with higher volatility. Here's a breakdown:

Performance: Small-cap funds tend to outperform in bullish markets but can underperform in bearish phases. Monitor the funds' performance against their benchmarks and peers.

Investment Horizon: Small-cap investments are best suited for long-term goals, typically 5-7 years or more. This duration allows the funds to navigate market cycles and potentially deliver better returns.

Risk Tolerance: Ensure your risk tolerance aligns with the volatility associated with small-cap funds. If you're comfortable with market fluctuations and have a long-term horizon, continue investing.

Diversification: While small-cap funds offer growth potential, consider diversifying your portfolio with large-cap or multi-cap funds to balance risk and return.

Review: Regularly review your investments, at least annually, to assess performance and alignment with your financial goals.

Considering the above factors, if you have a long-term horizon and can tolerate volatility, continuing your investment in these funds could yield better growth. However, ensure to monitor and review periodically.

Ans: You've been consistently investing in Axis ELSS, Bluechip, and Midcap funds for the past 3-4 years. While these funds have a good track record, the recent underperformance of Axis funds compared to their peers has understandably raised concerns. Let's assess this situation and provide some guidance for your next steps.

1. Performance Review of Axis Funds
Short-term Underperformance: It is common for even well-managed funds to go through periods of underperformance. The Axis funds may have underperformed compared to peers in recent years, but this alone doesn’t always justify stopping your SIP.

Long-term Focus: The key aspect of mutual fund investing is to focus on the long-term horizon. Look at the 5-year or 7-year performance of the funds instead of just 1- or 2-year periods. This will give you a better understanding of their long-term consistency.

Axis ELSS Fund:
Lock-in Period: Since ELSS funds come with a 3-year lock-in period, any changes should be made with caution. You need to consider the post-lock-in performance before switching.
Axis Bluechip Fund:
Large-cap Funds: Bluechip or large-cap funds generally tend to underperform in bull markets compared to small-cap or mid-cap funds. However, they offer stability during market downturns.
Axis Midcap Fund:
Volatility: Midcap funds are known for volatility. While Axis Midcap may not have delivered as expected in recent years, midcap cycles typically show substantial gains in the long run.
2. Reasons to Stay Invested
SIP Strategy: SIPs are designed to help investors take advantage of market volatility. By continuing with your SIPs, you will benefit from rupee-cost averaging, buying more units when the market is down and fewer when it’s high.

Market Cycles: Markets move in cycles, and different sectors or styles of funds perform better at different times. The underperformance of your Axis funds could be temporary, and exiting now might cause you to miss future growth.

3. Should You Stop SIP in Axis Funds?
While switching funds could be an option, it’s important to evaluate the following factors before deciding:

When to Consider Stopping SIP:
Consistent Underperformance: If the Axis funds have consistently underperformed their category average over a long period (5+ years), you may consider moving to better-performing funds.

Poor Management: If the fund manager has changed, or there have been significant changes in the investment strategy of the fund, underperformance could persist.

When to Continue SIP:
Recovery Potential: If you believe the Axis funds are poised to recover based on market conditions, sticking with your SIPs can help you benefit from a rebound.

Diversification Benefits: If the Axis funds provide solid diversification within your overall portfolio, consider continuing SIPs to maintain balance.

4. Considerations for Switching to Other Funds
If you decide to move your SIPs to other funds, here’s what you should consider:

Consistency in Returns: Look for funds that have delivered consistent returns over different time periods. Don’t just focus on recent top performers, as they may not maintain their performance.

Actively Managed Funds: Switching to actively managed funds can give you an edge. Unlike index or passive funds, active funds offer the flexibility for managers to adjust their portfolios based on market conditions, which can lead to better returns over time.

Professional Guidance: Working with a Certified Financial Planner (CFP) can help you assess which funds align with your goals. The CFP can monitor performance and recommend changes if required, while ensuring that your portfolio remains balanced.

5. Risks of Moving Too Soon
Timing Risk: Exiting a fund during a temporary period of underperformance can result in missing future gains. Timing the market or trying to switch between funds frequently may hurt your returns in the long run.

Transaction Costs: Moving SIPs frequently might incur exit loads or taxes. ELSS funds, for instance, come with a 3-year lock-in, and selling them early will incur penalties.

6. Maintaining a Balanced Portfolio
Before making any decisions, ensure that your portfolio remains well-diversified across different asset classes and sectors. A balanced mix of large-cap, mid-cap, and ELSS funds can provide stability while offering growth potential.

Diversification across AMCs: Consider spreading your investments across different asset management companies (AMCs) to avoid concentration risk with one fund house.

Rebalancing Regularly: Review your portfolio annually or biannually to ensure it aligns with your goals and risk appetite.

Final Insights
While Axis funds may not have performed well in the recent past, it is essential to evaluate your decision based on long-term performance and market trends. It might not be wise to stop SIPs solely based on short-term underperformance. If you do decide to switch, ensure the new funds fit your investment goals and risk profile. A Certified Financial Planner can guide you in making the best choices for your financial future.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

Ans: Investing in different categories, such as small cap, mid cap, and blue chip funds, offers diversification across risk levels and growth potential. Each category has unique strengths and responds differently to market cycles. Here’s an analysis to help you decide if you should continue or exit your investments.

Performance and Market Cycles
Equity funds, including small, mid, and blue-chip funds, typically perform differently in various market conditions.

Small cap funds often show high growth potential but can be volatile. Exiting during a temporary downturn may lead to missed long-term gains.

Mid cap funds provide a balance of growth and risk, as they represent companies beyond the initial growth phase but with room to expand.

Blue chip funds, representing large companies, generally offer stability and moderate returns, being less sensitive to market fluctuations. Exiting these funds could reduce the stability of your portfolio.

The Importance of Investment Tenure
Equity investments require a longer time horizon for optimal returns. Three years is relatively short, especially for small and mid cap categories.

Staying invested through market cycles typically allows these funds to realize their full growth potential. Exiting now could interrupt this compounding effect.

Key Factors for Evaluation
Assess the following before making any decisions:

Fund Consistency: Evaluate if each fund’s performance aligns with its historical and category average. Temporary downturns in small and mid cap funds can be normal.

Fund Manager’s Strategy: Assess if the fund manager has maintained a consistent and strategic approach in selecting stocks within the small, mid, and blue-chip spaces. A strong management approach may be a reason to remain invested.

Market Outlook: Look into current market conditions and projected economic trends. Small and mid cap funds often experience volatility based on market sentiment but recover during favorable market conditions.

Disadvantages of Direct Funds
Self-Management Complexity: Direct funds lack the benefit of a Certified Financial Planner’s ongoing guidance, which can be essential in understanding fund performance and adjusting strategies when needed.

Potential Missed Opportunities: With regular funds through a Certified Financial Planner, you gain access to periodic reviews and proactive recommendations. Direct funds leave this burden entirely on the investor.

Advantages of Actively Managed Funds Over Index Funds
If you’re considering index funds, it’s essential to note their limitations. Index funds follow a fixed market index without adapting to changing economic conditions, unlike actively managed funds. Here’s why actively managed funds might be better:

Dynamic Management: Actively managed funds adjust to market trends, whereas index funds cannot, which limits their potential returns in volatile markets.

Risk Management: Certified Financial Planners can strategically allocate assets based on real-time assessments. Index funds, by design, lack this flexibility.

Re-evaluate Based on Investment Goals
If your goals are long-term, continuing your investment in these funds may benefit from the compounding effect.

If your goals are short-term, reassessing your current allocation with a Certified Financial Planner may help adjust for risk management.

Final Insights
Making a decision based on a three-year performance period may not reveal the full potential of your investments, particularly in small and mid cap funds. Long-term wealth creation in equity often involves staying invested through market fluctuations.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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