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Should I exit Kotak Standard Multicap and SBI Small Cap?

One should exit a fund for two-three specific reasons, otherwise they should continue to stay invested, suggests Ashutosh Gupta

Should I switch out of Kotak Standard Multicap and SBI Small Cap as their large asset size will tend to make them sluggish?
- Ajit Shitole

Well, I would say, don't be in a hurry to do that. If indeed the large size starts to impact, it will be visible in the performance. Unlike stock investing where you may need to be a little more proactive with these decisions if something fundamentally goes wrong with the company or the valuations become far too stretched, there are really no such compulsions for a fund investor.

Ideally, you should look at exiting a fund for two-three broad reasons. First, if you need the money as your goal is approaching. Second, if there's a big shift in the investment style of a fund that dramatically alters the risk-reward outcomes of the fund from what you had signed up for. You can also look to exit a fund because of sustained underperformance.

But that is not the case with these two funds. On the contrary, they continue to be among the better ones in their respective categories. They boast a very robust track record of performance which they are continuing. So I think there is no reason to exit as of now.

The other thing is, some schemes also proactively put gates on the fund and stop accepting fresh inflows when they think the fund size is big enough or far too big for them and any further inflows would start dragging the performance. In fact, SBI Small Cap Fund did exactly that in 2015 when it put gates on fresh investments. Then it reopened for SIPs in 2018 and after this year's market crash, it opened up for lump-sum investments as well.

But the broad point is that funds do put gates proactively, at least some of them do, when they believe the size is too big. In that case, if you exit, you miss out on the potential gains and benefits of a strong fund management because subsequently you will not be able to re-enter the fund. So for now, continue to hold on.