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Time to Dump an Old Favourite?

Drop in rating and performance of Franklin India Bluechip has forced investors to think about exiting the fund. Should they press the sell button or wait for this fund to get its touch back?

Cynics may call it a fall from grace. Franklin India Bluechip's current out-of-form performance just got prolonged. But before you treat the fund the way BCCI jettisoned an out-of-form captain, Saurav Ganguly, read on to understand why the fund has lost touch and why a Ganguly-like strategy is uncalled-for yet.
Unlike cricket, where the batsman's ability to use his skills as per the playing conditions and quality of attack decides his form, an array of other factors play a crucial role in a fund's performance. A fund manager needs more than just stock-picking skills to do well every time. For example, he needs the market momentum in favour of his fund's style. And here lies the first reason for Bluechip's recent underperformance-time has not been as good for large-cap stocks (the bread and butter of Bluechip). But before we go into further details, let's recall how ugly the recent performances have been as compared to the past.
Till 2003, since its launch in 1994, the fund had an impeccable track record with category-beating performance every calendar year, except 1996. The trouble began in the second quarter of 2004 when the fund underperformed an average peer and continued the poor show for five successive quarters. This resulted in disappointing results for the investors in 2004 and 2005 when the fund slipped into the bottom half of the category. This led to a drop in the fund's rating-from five stars in August 2004 to three stars now. So, should investors make an exit?
Bluechip's role in any portfolio has always been that of a stable, large-cap core holding and this has made the fund look like a laggard in a bull-run that is dominated by mid-caps. Defends fund manager KN Siva Subramanian: “Generally, no one class consistently outperforms others. Bluechip, which invests in large-cap stocks, has relatively underperformed in recent times due to the re-rating of the mid-cap sector.”
While the not-so-favorable investment environment is one of the factors, some of the fund's sector calls have not helped either. For example, too much stress on energy stocks in 2004 didn't work. The buy-and-hold strategy also let it down. The fund lost on HPCL and BPCL bets. Its metal picks too failed to deliver. The same is true for some of its services holdings.
So, is it the time for investors to quit? We feel it's not. A high-flier losing some altitude in the course of time is a natural phenomenon. Franklin India Bluechip remains a quality, stable and well-diversified fund with one of the best management leadership around. Large-cap stocks usually demonstrate better resilience through stock market volatility, as they are well researched, constantly in demand and highly liquid. These factors make Franklin India Bluechip Fund a quality defensive play in the market and it has a good track record over the long term through the ups and downs of the markets. It may be a matter of time before the fund comes out again with flying colours. The fund has done well so far in 2006 - as on April 20, the fund is up 29.71 per cent as against peers' 26.71 per cent.

Having said that, fresh investments can be avoided at this point of time. Existing investors should track the fund closely. If it continues to lag behind peers and if you don't have any strong liking for a large-cap fund like this, you can switch to some better performing blend funds. And what if the fund's rating drops further to two stars - press the sell button right away. Since the Value Research rating measures funds' relative performances, two stars would mean there are many superior options available.