Mutual funds: How to find out and remove low-performing mutual funds from my investment portfolio?

If your mutual fund has a lock-in period, immediate exit may not be possible. In case you have a SIP, you may want to pause it.

Follow this strategy to Identify and weed out the laggards in your portfolio

The last two years have really tested the mettle of fund managers. Consistent exit by foreign funds owing to COVID-19, geopolitical issues, and the high market cap-to-GDP ratio has made the funds reliant on domestic investors, especially through the pooled SIP route. The entry-exit pressure has been visible on mutual fund returns across categories.

Mutual funds are undoubtedly investments for the long term. However, there is no reason for you to be tied to an investment if it hasn’t been performing as expected. The opportunity cost of staying invested in under-par funds keeps increasing with time, while there are better options available. What experts are now calling the ‘up or out’ strategy needs to be incorporated by every active investor.

Also Read: Not Sure Which Mutual Fund Schemes To Invest In The Current Volatile Market? Here Is The List Of Stable Performing Mutual Funds In India

How to go about identifying the laggards in your investment portfolio?

Financial advisors suggest that mutual fund investors should conduct a portfolio assessment once every quarter. Funds that are not in the top quartile of their category should be marked for culling. However, you should evaluate the funds’ strategy and reason for underperformance over the previous 2-3 years. 

Here are the three main parameters you should consider:

  1. AMC’s track record: The long-term track record of the Asset Management Company (AMC) across funds can be a strong indicator (but not a guarantee) of future performance. If one or two funds among the many are underperforming, it could be due to the investing approach or stock calls that haven’t paid off yet. 
  2. Sector performance: The pandemic has had different impact on different industries. While the demand for new technologies has given a push to IT stocks, the shortage of semiconductors has pulled automobile stocks down. For sectoral funds, understanding the impact of macro factors is important.
  3. Management style: Change in key personnel and management style will also reflect on a fund’s performance. You can give it some time to see how the new team settles in and if they are able to bring some disruptive results.

Also Read: Mutual Funds Vs Shares - Which One To Choose?

What should be the culling strategy?

Return on investment should not be the only variable that dictates whether a mutual fund should remain in your portfolio. Various features of mutual funds in terms of market cap, diversification, fund size, geography, management style, etc., should all be considered. 

Once you have identified which stragglers need to go, here are some things to keep in mind:

  • If the fund has a lock-in period, immediate exit may not be possible. In case you have a SIP, you may want to pause it.
  • If the fund levies an exit load for redemptions before a specified period, consider waiting it out (if it is not more than 4-6 months). Otherwise, take the hit and reinvest for high returns.
  • Unless you are rebalancing your portfolio, the reallocation of funds should be in line with your existing asset allocation strategy.
  • Consider the tax implications of redemption.

Also one should not fall victim to recency bias. Read this Premium article by Saikrupa Chandramouli to understand How recency bias impacts your investing decisions?


Related Article

Premium Articles

Union Budget