I am investing in one of the large cap bluechip funds and also Nifty 50 Index fund. Should I stop one out of these two due to stock overlapping?
—Vikram Prabhu
Given that fund managers invest a large portion of the fund portfolio into the securities in the bench-mark, there is bound to be some overlap between the active fund and its benchmark. Fund managers aim to generate alpha by being over/ under-weight securities/ sectors subject to their desired level of tracking risk. Investors opt for passive funds only if they believe active managers cannot out-perform the benchmark after expenses. Another benefit is the low-cost exposure to the desired asset class. In recent years, most fund managers parti-cularly in the large-cap segment have found it difficult to beat the benchmark. Hence the increased attention towards passive funds in recent times.

However, there are risks such as security/sectoral concentration risks. If the benchmark index has no cap on security level weights, the index fund may turn out to have a high concentra-tion to select securities, which exposes the portfolio to company-specific risks. Managers of index funds cannot protect the downside by moving away from the sector/security in case the outlook for the same deteriorates as they are mandated to mirror the index.

You could look to invest with a mix of both active and passive funds for expos-ure to the large-cap segment, which would provide the best of both—an opportunity to capitalise on opportuni-ties via active management and limiting overall portfolio costs. An additional factor to consider while selecting an active fund is the active share of the fund vs benchmarks.

How much can I redeem from my investments in a systematic investment plan for five years? Will there be any exit load?
—Gopal Baluni
SIP investments can be withdrawn anytime unless the units are under a lock-in period. Remember the exit load charge if redeemed within the exit load period. Units procured under each SIP installment are subjected to a lock-in or exit-load period (if applicable) from the date of that installment. The redeemed proceeds would be subject to capital gains tax (short-term or long-term) depending on the holding period.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com