Be it any form of investment, everyone hates seeing that red colour in the portfolio.  This is certainly reflected in our behaviour too. According to a survey, nearly 50% of equity investors redeem their mutual funds in first 2 years. 

Now, investing is a long-term game but when you have a poorly performing fund, it’s natural to think about exiting the fund.

But should you exit or wait for the mutual fund to bounce back?

I have listed a bunch of factors here that you must consider before thinking about exiting a poorly performing mutual fund.

Figure out if it’s a poor performer

Firstly, you should examine how well it performed in comparison to other funds in the same class. Just check if they have fallen too. 

It would be unfair to label a fund as underperforming if its returns decrease is in line with a decline in the stock market and other funds also display a comparable pattern. 

But, then what is poor performance? Well, you can examine the performance of your fund by comparing it with the benchmark and category average. Then too, if the fund underperforms consistently for 2-3 years, only then think about exiting.

Another factor you can check is the fund’s rolling returns about its benchmark as well as its risk-adjusted performance when evaluating its performance. 

Also Read Full List of NFOs in February 2024.

Poorly performing fund identified, now what?

If the fund has been performing poorly then you should figure out the reason:

1. Poor Fund Management: If the fund manager has changed, and if the underperformance occurred at the same time as the change. It’s probably time to leave. If not, there’s a possibility the fund management disclosed the rationale in a media interview or the monthly newsletter of the fund company. Examine it and see if the justification is sound. 

If the underperformance is majorly due to poor management, then you can withdraw from the fund and reinvest in one with a decent track record that is more aligned with your financial goals.

2. Investing Style Drift: Sometimes funds can change their investing styles due to which returns might suffer a little. This can be due to a long-term vision. Therefore, one shouldn’t act too hastily in such a case.

However, if there are significant alterations to the fund management team, persistent deviation from the stated investment philosophy, excessive exposure to risks (such as penny stocks), or a change in ownership inside the AMC, then it is a more serious problem.

Overall, it’s advisable to go through all the parameters above before taking any drastic action as sometimes funds might have a long-term vision, therefore, analyse it well before exiting.

Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered investment advisor before investing in any mutual fund.