Mutual fund investing is an exercise in patience and discipline with clear thinking. However, even experienced investors struggle with a very common problem: What do I do about an underperforming fund? Is this a short-term slump or a red flag that demands an exit?
At VSRK Capital, we believe that the essence of successful investing isn’t just making the right choices of funds, but also recognizing the right time to sell an underperforming fund. Let’s examine the indicators of genuine underperformance, when to take action, and how to make improved investment choices.
Knowing Underperformance: Not All Lows Are The Same
First, let’s deal with the obvious that markets are unpredictable. It’s not unusual for a mutual fund to experience a period of low returns. But underperformance does not always indicate that something is amiss. Not every underperforming fund signals danger; context matters. A fund can underperform in the short term due to general market conditions, economic occurrences, or sectoral trends.
The true issue occurs when a fund underperforms consistently its peer funds and benchmark across longer time frames, say, 18 to 24 months. That’s when you sit up and take notice.
When Should You Sell an Underperforming Fund?
Below are the signals that you should sell:
1. Underperformance Over Time Frames
Evaluating an underperforming fund requires looking at consistency, not isolated results. One poor quarter? No problem. However, if your fund underperforms persistently over 1-year, 3-year, and 5-year time frames—particularly when its category average and benchmark are performing well—it may indicate more fundamental structural problems.
What to do: Look at your fund’s performance compared to other similar funds in its category. If it trails behind with comparable market exposure, it might be time to make a change.
2. Change in Fund Management
Fund managers are key drivers of performance. An abrupt change in the management team or investment approach can affect consistency. If the new manager lacks a strong track record, it introduces risk to your investment.
What to do: Track fund manager changes. Wait for a minimum of 2–3 quarters after the transition to gauge their effectiveness before making a decision.
3. Strategy Drift
A fund that claims to invest in blue-chip stocks but is suddenly holding small-cap or high-risk assets is undergoing strategy drift. This increases risk and misaligns with your original goals.
What to do: Review the fund’s portfolio composition. If it no longer reflects your investment philosophy or risk appetite, consider shifting.
4. Unjustified High Expense Ratios
Funds charge an annual fee (expense ratio) to manage your money. If the fund’s performance is mediocre but its expense ratio remains high, your net returns take a hit.
What to do: Select funds that offer superior risk-adjusted returns at a reasonable price.
5. Fund Size or Asset Shrinkage
A sharp decline in Assets Under Management (AUM) can diminish liquidity and operational efficiency. If the fund has been hemorrhaging capital, it might affect its ability to maintain quality stocks or tap timely opportunities.
What to do: Monitor AUM trends. Sustained outflows may be a cause for concern.
When You Should Not Panic Over an Underperforming Fund
Investors tend to act impulsively when markets fall. However, some underperformance is not a reason for an instant withdrawal. Here is when you need to stick:
1. Short-Term Market Corrections
A technology-heavy fund may lag if the technology space is going through a downturn. But if its long-term strengths are still intact, it may recover.
2. Volatility Due to Global Events
Market-wide declines caused by geopolitical tensions, inflationary surges, or short-term economic shocks are another matter. Short-term market slumps can freeze losses and curtail recovery profits.
3. The Fund Is Still In Sync With Your Objectives
If your fund remains aligned with your time frame, risk capacity, and money objectives, short-term dips must not prompt you to leave.
Tip: Invest using Systematic Investment Plans (SIPs) during low points and capture rupee cost averaging benefits.
Why Professional Advice Matters
At VSRK Capital, we encounter investors who regret having acted in a rush during times of slump. Market timing is difficult, even for experts. That’s why having a reliable mutual fund distributor by your side can give you clarity, strategy, and discipline.
Whether you’re handling SIPs, tax-saving ELSS funds, or thematic investments, our job is to lead your journey with data-driven advice, not whims.
Conclusion: Know When to Hold and When to Fold
Mutual funds are mighty wealth builders, but not all funds are born equal. Underperformance can be a short-term thing. Deciding whether to retain or remove an underperforming fund is about long-term clarity, and on other occasions, it can be a warning sign. The answer is to know why a fund is trailing and whether it has any business remaining in your portfolio.
Leaving a fund is not a failure—it’s prudent risk management. And with the best advice, your investing journey can remain direction-led, robust, and goal-oriented.
Want personalized guidance on your mutual fund investments? Visit us on Google and get directions, reviews, and contact details. Let VSRK Capital be your trusted financial partner.
FAQs
How Frequently Should You Check Your Portfolio?
This is perhaps the single most valuable habit an investor can develop.
Check every 6 to 12 months.
You should also have a review caused by major life events (career change, marriage, kids).
Use portfolio reviews to measure performance, rebalance asset allocation, and re-evaluate alignment with life goals.
You don’t have to check your portfolio daily. Excessive monitoring tends to result in emotional decision-making, which damages long-term returns.
What If My Fund Hasn’t Performed Well in a Year?
A single year of low returns doesn’t necessarily make a fund bad.
Before acting, ask:
Is the underperformance aligned with a broader market decline?
Are peer funds also facing similar headwinds?
Has the fund manager taken corrective action?
If the answers lean toward external factors, it’s wise to stay patient. However, if your fund is an outlier in a rising market, further evaluation is necessary.
Steps to Take Before Selling:
Compare performance to the benchmark and peer funds.
Evaluate the fund manager’s past choices and portfolio approach.
Check your goals—does the fund still fit its purpose?
Evaluate costs—exit loads, taxation, and opportunity cost.
Consult a financial advisor—receive an objective review before acting on emotions
