I invest in one of the large cap bluechip funds and the Nifty 50 Index fund. Should I discontinue one out of these two due to stock overlap?
—Vikram Prabhu
Since fund managers invest a large portion of the fund’s portfolio in benchmark securities, it is inevitable that there will be some overlap between the active fund and its benchmark. Fund managers aim to generate alpha by overweighting/underweighting stocks/sectors subject to the desired level of tracking risk. Investors choose passive funds only if they believe the active managers cannot outperform the benchmark after expenses. Another benefit is the low cost exposure to the desired asset class. In recent years, most fund managers, especially in the large cap segment, have struggled to beat the benchmark. Hence the increased focus on passive funds lately.

However, there are risks such as security/industry concentration risks. If the benchmark does not have a cap on security-level weightings, the index fund may turn out to have a high concentration in selecting securities, exposing the portfolio to company-specific risks. Index fund managers cannot protect the downside by walking away from the sector/stock in case the outlook for the same deteriorates as they are mandated to mirror the index.

You might seek to invest with a mix of active and passive funds for exposure to the large-cap segment, which would provide the best of both: an opportunity to capitalize on opportunities through active management and limit overall portfolio costs. An additional factor to consider when selecting an active fund is the fund’s active share relative to benchmarks.

How much can I redeem from my investments in a systematic investment plan for five years? Will there be an exit charge?
—Gopal Baluni
SIP investments can be withdrawn at any time, unless the units are subject to a lock-up period. Don’t forget the exit charge if refunded during the exit charge period. Units purchased under each SIP tranche are subject to a lock-up or release period (as applicable) from the date of that tranche. Redemption proceeds would be subject to capital gains tax (short-term or long-term) depending on the period of holding.

The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected]