I saw your keen interests in MF related issues in rediffGURUS and would like to get some insight on my MF investments as follows:- SBI Contra Fund - Direct Plan - Growth 9.7% JM Flexicap Fund - (Direct) - Growth Option 9.7% HDFC Flexi Cap Fund - Direct Plan - Growth Option 9.2% NIPPON INDIA MULTI CAP FUND - DIRECT GROWTH PLAN GROWTH OPTION 8.2% DSP India T.I.G.E.R. Fund - Direct Plan - Growth 7.0% ICICI Prudential Energy Opportunities Fund - Direct Plan - Growth 5.6% NIPPON INDIA VALUE FUND - DIRECT GROWTH PLAN GROWTH OPTION 5.3% Quant ELSS Tax Saver Fund - Direct Plan 4.5% Tata Resources & Energy Fund Direct Plan Growth 3.9% Quant Aggressive Hybrid Fund - Direct Plan Growth 3.0% Quant Mid Cap Fund - Direct Plan 1.8% Quant Multi Cap Fund - Direct Plan 1.3% HDFC Dividend Yield Direct Growth 0.3% All the above were in lumpsum investment for long term, made in different time mostly in past 1-1.5 years where the CAGR is shown on the right. Above consists of about 6% of my total portfolio at present valuation, which I started 2.5 yrs back. But still, I consider these 6% as black sheep, since they are still less than 10% CAGR. Overall, my CAGR is more than 16%, XIRR also more than 16% and I am perfectly tuned to that. What is your take on the above? Should I hold or sell and put in HDFC/ICICI Bal Adv? Kindly give your expert advice. Thanks in advance.

Ans: You have done an excellent job with your investments so far. A 16%+ XIRR and CAGR in your total portfolio reflect smart decisions, patience, and discipline. Many investors struggle to stay invested or diversify properly, but your structured approach shows maturity and confidence. Your willingness to evaluate the underperforming part also shows that you are serious about improving your returns over the long term.

» Overall Assessment of the Portfolio

Your current portfolio consists of several funds spread across multiple themes like contra, flexi cap, value, energy, multi cap, ELSS, hybrid, and dividend yield. You mentioned that all these funds form around 6% of your total portfolio and were bought as lump sum investments over the last 1–1.5 years.

In the context of your total portfolio, this 6% portion is relatively small, but it still deserves review. Since the rest of your portfolio is generating a strong 16% return, this segment feels like an underperforming pocket.

However, before any action, it is important to understand whether the underperformance is structural (due to poor fund selection) or temporary (due to market cycles or timing).

» Time Frame and Performance Evaluation

Your average holding period for these funds is between one and one-and-a-half years. This duration is still short for equity mutual funds, especially for thematic or contra styles.

Contra, value, and thematic funds generally move in cycles. Their performance often lags in certain phases but catches up later when the market rotation changes. For instance, value and contra funds usually underperform during momentum-driven bull runs but outperform when valuations normalise.

Therefore, judging these funds based only on 12–18 months of performance may not give a fair view. Equity funds require at least 3–5 years to demonstrate their potential.

Your patience in holding them till now is good. But a little more holding period is needed to assess if they can contribute meaningfully over a full cycle.

» Sector and Theme Exposure

From your list, there is exposure to energy, resources, infrastructure, and thematic ideas like value and contra. These sectors often perform in bursts depending on economic cycles.

– The energy and resources funds may look weak now because commodity cycles have cooled down recently. When global growth or domestic capex picks up, these funds can show strong rebounds.
– The contra and value categories perform better when markets correct and value re-emerges. Presently, markets are driven by large-cap and momentum-oriented stocks, so contrarian styles naturally look dull.
– The multi-cap and hybrid categories are stable, but their returns can look muted when narrow market leadership limits mid and small-cap growth.

Hence, your lower CAGR in these funds is mainly a timing issue, not a fundamental failure. The funds need more time and the right cycle to deliver.

» Portfolio Overlap and Diversification Check

Another point is that your portfolio has several funds with similar strategies. For example, you hold multiple flexi cap and multi-cap funds, and a few with overlapping sectors. This may cause duplication of holdings and dilute the performance impact.

While you have diversified well, sometimes too much diversification can reduce effectiveness. Having 10–12 funds with overlapping holdings across similar sectors can act like an index — without actually gaining from active management.

Instead of holding so many funds in small percentages, a better approach is to consolidate into 4–6 strong, diversified funds. Each should represent a clear style — one flexi cap, one large & mid cap, one multi cap, one value/contra, and optionally one hybrid for stability.

This approach makes it easier to monitor and adjust the portfolio without overlap.

» Active Funds vs Balanced Advantage

You mentioned the thought of selling these underperforming funds and shifting to balanced advantage funds of HDFC or ICICI. Balanced advantage funds offer automatic asset allocation between equity and debt based on market valuations. They are less volatile and suitable for moderate risk investors or near-term goals.

However, you are already an experienced investor with a well-performing portfolio at 16%+ CAGR. Your comfort with equity volatility is proven. Hence, replacing thematic and diversified equity funds with balanced advantage funds may reduce your long-term growth potential.

Balanced advantage funds usually deliver around 9–11% over long periods because of partial debt exposure. On the other hand, pure equity diversified funds can deliver 13–15% over the same horizon if held patiently.

Therefore, if your goal is long-term wealth creation, it is better to hold your equity funds and give them time to perform rather than move into lower-return hybrids.

You can consider balanced advantage funds only if your risk tolerance has changed or if this portion is meant for near-term needs within 3 years.

» Why the Underperformance Is Temporary

Your current underperforming funds belong to categories that are temporarily out of favour. For example, energy and resources sectors are cyclically slow, and value or contra funds lag during growth-driven markets.

But these categories often bounce back strongly once the economic cycle changes. When broader market participation widens, value and contra strategies outperform growth funds. Similarly, energy and infrastructure funds benefit from government spending and manufacturing growth.

Hence, instead of judging them as “black sheep,” treat them as “slow burners” that may reward you later.

The key is to monitor if the fund managers stick to their original style and maintain portfolio quality. If so, give them time.

» Holding Period Discipline

Since all these investments were lumpsum, market entry timing has played a big role in the return. If you entered during market highs, short-term returns would look subdued.

However, over 3–5 years, the market averages out such timing issues. The compounding effect of good fund management appears over time.

Therefore, do not rush to sell based on 10–18 months of data. Give each fund at least 36–48 months to prove performance across cycles.

If after that period, the CAGR still remains below 10% while peers deliver above 13%, then you can consider a switch. But not now.

» Direct Funds vs Regular Funds

You have invested through direct plans. Many investors assume direct plans give higher returns because of lower expenses. But direct funds also require regular review, rebalancing, and active management by the investor.

Without the guidance of a Certified Financial Planner, investors often make emotional decisions or hold overlapping schemes. That affects real-world returns more than expense ratio differences.

Investing through regular plans with a Certified Financial Planner brings structured monitoring, timely fund switches, and professional rebalancing. These benefits often outweigh the small cost difference.

You already handle a large portfolio. Hence, partnering with a Certified Financial Planner for ongoing review can help optimise returns and reduce duplication.

» Tax Efficiency Considerations

Since these are equity mutual funds, long-term capital gains (after one year) above Rs 1.25 lakh are taxed at 12.5%. Short-term gains are taxed at 20%.

If you redeem now, you may trigger short-term gains on some holdings. Waiting for a full year (or longer) ensures more tax-efficient exits.

Therefore, avoid selling now unless absolutely necessary. Time your redemptions to qualify for long-term capital gains.

» Suggested Action Plan

Based on your overall position, here’s what you can do:

– Continue holding all these funds for at least another 2–3 years.
– Monitor performance yearly, not quarterly. Compare with category averages, not individual peers.
– Do not switch to balanced advantage funds now; stay invested in equity for long-term compounding.
– After 3 years, consolidate into fewer funds if overlap remains or performance lags.
– If you add new money, allocate it in your core funds (flexi or large & mid cap) rather than increasing exposure to themes.
– Rebalance annually to maintain clear allocation across large, mid, small, and thematic segments.

This approach will help your portfolio stay lean, productive, and aligned with your long-term goals.

» Why Not to Chase Short-Term Numbers

Even the best-performing funds go through temporary underperformance. A fund that gave 25% CAGR over five years might show 8–10% for one year depending on sector rotation.

Short-term lag does not mean poor management. It often reflects market cycles. Switching during such phases usually leads to regret later when the same fund rebounds.

Hence, patience is your best strategy. You have already proven discipline by holding a 16%+ portfolio return. Continue that mindset.

» Psychological Comfort in Portfolio Management

Many investors dislike seeing “red” or lower CAGR numbers in part of their portfolio. But a well-diversified portfolio will always have some segments underperforming. That is actually healthy.

If all funds perform together, it means the portfolio is overexposed to one market theme. True diversification means some parts lead while others lag — and leadership rotates over time.

Therefore, do not try to make every fund deliver identical returns. Focus on total portfolio CAGR, which already exceeds 16%. That is the real indicator of success.

» Finally

You are already in a strong financial position. Your portfolio is performing better than most investors achieve. The underperforming funds are not a threat — they simply need time and market rotation to catch up.

– Do not redeem now. Continue holding for 2–3 more years.
– Avoid switching to balanced advantage funds unless you want lower volatility.
– Consolidate only later if overlap or persistent lag appears.
– Review annually with a Certified Financial Planner for a full portfolio alignment.
– Remember, the goal is total portfolio growth, not equal performance across funds.

Stay patient, focused, and disciplined. Your overall approach and mindset are already leading you toward strong, sustainable wealth creation.

Best Regards,

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

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