Is LT Emerging Businesses a Good Fund for SIP Despite Poor Performance or Should I Switch?

With emerging markets showing volatility, the question of whether to continue Systematic Investment Plans (SIP) in a fund that isn't performing well or switch to a more stable investment remains a pertinent one. LT Emerging Businesses Small Cap Fund, managed by LT Fund Management (LT MF AMC), is one such fund that has garnered attention for its performance over the years.

The Fund at a Glance

LT Emerging Businesses was launched on 12th May 2014 and operates under a large-cap mid-cap bias. With a high risk associated, it falls under the category of open-ended schemes. As of recent reports, the fund management company has Rs 4697 Cr in assets, with an expense ratio of 2.05% and a turnover rate of 28.5%.

When it comes to risk measures, several metrics highlight its characteristics. The standard deviation stands at 25.64, indicating high volatility. The Sharpe ratio is -0.38, which is below average, and the Beta value of 0.85 reflects a moderate risk profile. While the alpha is 0.01, suggesting little outperformance, the fund is managed by the astute Mr. Venugopal Manghat, who has been in charge since 17 December 2019.

The fund's portfolio is composed of a mix of 66 small-cap stocks and 34 mid-cap stocks, with no allocation to large-cap stocks.

The Current Performance

Over the past three years, the fund has seen a negative performance, with a -8.45% return. Even in the past five years, the performance has only been marginally positive, with a 5% gain. Specific to the short-term, the performance is a mix:

Risk measures reveal a modest return, with alpha at 0.01, and notable variation as indicated by beta. The negative Sharpe ratio (-0.38) indicates that the fund’s risk-adjusted return is subpar.

Volatility and Redemption Charges

Volatility is characteristic of small-cap funds, but it comes with its own requirements. The fund charges an exit load of 1% on units redeemed within 365 days, further impacting the overall returns.

Conclusion and Recommendations

Small-cap funds like LT Emerging Businesses can be suitable for aggressive investors, especially those who can tolerate volatility. For the past two years, the fund has struggled, with negative returns and looming risks, particularly with its exposure to real estate stocks at 11%. Given the current market conditions, it might be advisable to reassess the fund.

Does this mean you should switch SIPs? It depends on the investor's risk tolerance and long-term goals. If the primary goal is to maintain a diversified investment portfolio, it may be prudent to consider other small-cap funds or perhaps shift towards larger or mid-cap funds.

Fund Recommendations

Axiom Mutual Fund’s Small Cap Fund has been recommended by experts, offering a similar exposure to the small-cap segment. This fund has demonstrated more consistent performance than LT Emerging Businesses in recent years.

In any case, retaining patience and a long-term strategy, ideally spanning 15 years, is crucial. Keeping up with market trends and expert advice can help inform better decision making. Regularly reviewing and adjusting SIP investments can lead to better outcomes in the long run.