Comparing the performance of a large cap fund (Franklin India Blue Chip) and a mid and small-cap fund (Franklin India Prima) can be instructive in at least two ways.
- It allows us to understand volatility and risk (associated with a investment duration) better
- It helps answer questions like, should I avoid large caps and have more of mid/small cap exposure for goals several years away?
The two funds from Frankin are 20 years old which allows us to study long-term rolling returns.
The Fund A vs. Fund B Rolling Returns Calculator was used for this study.
First the normalized NAV movement.
Since we have data for several years, the recent NAV movement dominates that during early years. So we need to look at the NAV movement in a logarithmic scale which expands the early year data (but compresses the recent data)
It is important to understand that what goes up fast will also come down fast. Notice the steep fall during 2008. The steep increase in recent months is therefore worrisome.
Now let us look at rolling returns. It is important to recognise that if a rolling return is computed for 5 years, each data point in the curve is a 5 year returns. So if I have 20 year data, in a 5 year rolling return calculation, the 5 year interval is shifted from the starting point by one day. So this allows us to measure consistency in performance and gives a clear picture of volatility.
Not much difference from the large cap and mid/small-cap fund but that is irrelevant since we ought to stay away from equity for up to 5 years. We will never know what return we may get.
Risk = Volatility in this case
A little equity exposure won't hurt. Not much to differentiate between the two funds.
Notice that the fluctuations are now above 10%. Which is healthy. Mid/small caps may work in a bull run but do not outperform large caps during a sideways market.
The fluctuations have decreased. Meaning your CAGR will reduce down the line but will fluctuate less. Not the mid/small cap is pulling away from the large cap fund.
So can we now conclude that if the investment duration is above 15 years, one can have significant mid/small cap fund exposure as they are likely to outperform the large cap funds?
On paper, yes. What about the emotional turmoil of holding such a portfolio? Scroll up and see how Franklin Prima behave during the market crash? How many can survive that?
Most of the people who want to hold mid/small cap funds are young guns who have stated investing a couple of years ago. Sorry, that is a dumb thing to do.
The difference between risk and volatility increases with increase in investment duration.
Volatility is necessary but evil. Unless the asset class is volatile, it is impossible to beat inflation with it. However, take on too much volatility and it will erode your corpus.
What matters is the performance of your portfolio and not that of your fund.
The 100% large cap guy would have still comfortably beat inflation with much lower volatility.
Keep it simple. Choose among these minimalist portfolio ideas for young earners and invest calmly.
SIP returns from 1st Dec. 1993 (source FT website)
Franklin Blue Chip: 23.32%
Franklin Prima: 23.06%
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