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Photo: iStock
Photo: iStock

Be ready for volatility when buying a small-cap fund

Select a fund based on your risk appetite

I am an aggressive investor with a time horizon of 5 years. I want to start an SIP of 5,000 per month in two funds each. Which one should I choose: Invesco India Contra Fund, HDFC Small Cap Fund, ICICI Prudential Bluechip Fund or SBI Bluechip Fund?

—Shivam Agarwal

Of the four funds in your list, two are large-cap funds, one is a small-cap fund, and the Invesco fund is a broad market fund with a value/contra style. For your portfolio, ideally, you would need one of the two large-cap funds and another fund from the remaining two to complement it. You can go with either of the two large-cap funds since they are both good, well-rated funds with a good track record. For the second fund, you can go with one of the two funds in your list based on your risk tolerance level. The HDFC Small Cap Fund is the more volatile of the two funds but holds the promise of a higher return if you can hold on through periods of turbulence. So, pick this fund if you have higher risk appetite. Otherwise, you can go with the Invesco Contrarian fund.

I started investing 5,000 last month in SIPs of Tata Equity P/E Fund ( 2,000), Invesco India Contra Fund ( 2,000) and Axis Focused 25 Fund ( 1,000). Have I chosen suitable funds?

—Rupesh Nandvikar

You are investing in two funds that are categorised as “value funds" in the new Sebi categorisation structure and one that is labelled a “focussed fund". Value funds try to identify undervalued stocks of good companies for their portfolio and focussed funds are required to invest in small, concentrated portfolios. The Axis fund has a distinct large-cap bias (80% of its holdings are in the large-cap segment of the market), so from a market-cap perspective, it can be considered a relatively low-risk equity fund. Of the two value funds, the Invesco fund is a good performer in the category. The Tata fund is middle-of-the-pack and has been struggling recently. Also, having two value funds is not necessary. You can consider replacing that fund with a regular diversified fund such as Franklin India Equity fund.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com. Queries and views at mintmoney@livemint.com

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