What to Do When Your Mutual Fund Underperforms
CA Bhaskar Abhishek
11/19/20244 min read
Usually there is some gain and loss associated with investing in mutual funds. Short-term volatility is quite natural and is something investors could easily live with, unless, of course, there is a consistent underperformance. However, not all underperformance makes it relevant to take severe measures. Read on and discover the step-by-step guide on what to do when your mutual fund underperforms.
1. Understand, what underperformance actually entails
The underperformance of mutual funds can be either transient or sustainable. To respond effectively, you need to distinguish between the two:
Temporary Underperformance: Occasionally due to the market factors or specific sector conditions prevailing at a particular period.
Structural Underperformance: Shows the management of funds, strategy or consistently poor performance compared to benchmarked companies.
Action Step: Benchmark it against an index of funds that the fund is supposed to be tracking or against other similar funds over one-year periods as well as periods of three years and five years.
2. Do not merely cite the facts as to why you are underperforming
To further the management’s analysis of the causes of underperformance move deeper. Here’s what to evaluate:
Market Trends: Are issues of an external nature such as slow economic growth or certain sector constraints affecting the fund?
Fund Strategy: Does the particular fund’s style fit your objectives for your financial future? In so doing, we can call, for instance, value-oriented funds disadvantaged at the phases recognized as growth-oriented markets.
Expense Ratio: Higher management fees are detrimental to the growth of the returns.
Portfolio Changes: Hairpin and badly timed changes in the fund manager portfolio can be costly.
Action Step: In the previous step, use a fund fact sheet and the performance commentary made by the AMC of the fund under consideration.
3. Benchmarked and Category
Evaluate the fund’s performance against its benchmark index (e.g., Nifty 50, S&P 500) and similar funds in its category:
Consistent Lagging: Invalidation can also be seen when your fund constantly posts that it is underperforming its benchmark and other comparable funds.
Volatile Periods: A temporary decline may only be a cyclical feature of the market.
Action Step: Check relative performance with Morningstar or Value Research or via when your platform used for obtaining funds.
4. Evaluating Investment Time Horizon
The fact is that short-term performance may not influence the long-term results if your investment period is long-term. For instance:
Equity Funds: These are inherently risky and are used better over 5-10 years.
Debt Funds: Repeated low returns here should be concerning because they are meant for stability and modest returns.
Action Step: These conditions match the fund’s performance over time on your timeline and risk profile.
5. Surveil arises on the actions of the Fund Manager
A mutual fund depends upon the efficiency of a fund manager who adopts specific techniques for getting the required returns. Look for:
Recent Changes: Has there been a recent replacement in the fund manager position? The idea here is that a new manager may require some time to move in the direction of the fund.
Consistency: What is the manager’s performance record on other similar funds?
Action Step: AMCs should be reviewed for manager vision and strategies in their most recent period.
6. Review Your Investment Goals
At other times, poor performance is due to improper alignment of your goals with the objectives of the fund. For example:
High-Risk Funds: This may not be appropriate for a conservative investor who puts the priority on the preservation of investment funds.
Thematic Funds: Depending on particular sectors, the performance can be branch-specific and occasionally fall out for some time.
Action Step: Review every objective set in the area of financial management to check if the fund is still needed, and if the investor is ready to bear the risks involved.
7. Avoid Panic Selling
Giving an emotional response to poor performance has implications which include loss. This means that when an investor is selling a fund during a temporary loss of market share, he is actually deciding on a loss and may be completely off track regarding his or her financial plan.
Action Step: Continued showing how important it is to follow a disciplined investment plan so that reactive decisions based on short-term fluctuations are not made.
8. Rebalance Your Portfolio
If the particular underperforming fund is disproportionately lowering your portfolio’s performance, then it is time to rebalance. This involves:
Reducing Exposure: Transfer some of the money to higher returning mutual funds.
Adding Diversification: They (solutions) should accommodate other funds from other categories or asset class types to minimize risks.
Action Step: Speak with a financial planner to meet this need or to make changes within your portfolio if necessary.
9. Consider Exiting the Fund
The benchmark is again set highly subjectively when giving the fund 3–5 years during positive returns and if the fund continues to underperform, it may be time for one to pull out. Key signals include:
Low return when even the market is on the rise.
In this aspect, it is high expense ratios as compared to competitive firms.
The strategy of investment in Filipino companies is not in line with what the country has to offer.
Action Step: Withdraw your invested amount, and instead, invest in those good-performing funds that also offer you what you want.
10. Learn from the Experience
Experience shows that each investment decision is a good experience and a source of knowledge. Analyze what could have gone wrong in order to have the ability to make the right decision in future.
Key Takeaways:
It will always be wise to invest in several mutual funds to avoid concentrating all your investments in one single fund.
One should do their homework before investing in any fund.
Performance should be checked at intervals so that undesired performance can be corrected immediately.
Final Thoughts
Lack of returns in a mutual fund is not an indication of incompetence. One must stay rational and make correct decisions based on the financial analysis and goals a person has. As you assess, analyze and follow up on any threats you can be able to transform threats into opportunities and always get your investment back on track for optimal performance.
Happy Investing and Keep Learning
Article by CA Bhaskar Abhishek
How Do Mutual Funds Pay Dividends?