It’s a rare instance when you look at the performance of a fund and come away with a solid sell decision. In reality, it is more often than not a case where one is plagued with indecision. Should you stay on, you run the risk of seeing your money languish even longer in a sluggish fund. Exit and to your dismay, it may mount a comeback. Either way, you come out feeling like a sucker.
Here's how to figure out if something has really gone awry with your fund.
Make the right comparisons
Lower returns on their own are not always an indication that the fund is a loser. You have to determine whether or not it is actually delivering sub-par returns. The only way to figure that one out is to see how it compares against those that have a similar investment mandate.
Let’s say you invested in IDFC Imperial Equity, which delivered 66% in 2009. I am not denying that it is an impressive return. But if you compared it to ICICI Prudential Discovery which delivered 134% that year, you would think your fund significantly underperformed. This would be a distortion of reality because in 2009, mid-cap funds on the whole did better than the large-cap ones. IDFC Imperial Equity is a large-cap offering and would need to be compared with peers in that relevant category.
Not only does ICICI Prudential Discovery sport a small/mid-cap portfolio but the fund manager picks stocks that he believes are trading at a significant discount to their fair value. A different investment mandate too. Which also means that when momentum stocks rule the market, ICICI Prudential Discovery will have a hard time competing. That explains a performance of just 40% in 2007, when, incidentally, IDFC Imperial Equity delivered 54%.
Be careful about your comparisons or else you may end up pulling the plug on a winner. This tool will help you sort funds based on their category to help you make a very informed decision.
Take a significant time frame
Don’t be hasty. Just because the fund in question is not sitting on top of the performance chart in a year does not mean it has to be kicked out of your portfolio. Occasional ups and downs come with the territory. Instead, look at how it has fared over years. Don’t bail out at the first sign of underperformance. In 2007, ICICI Prudential Discovery faced a rough patch, relatively speaking. It delivered 40%, way below the small/mid-cap category average of 61%. This was simply a reflection of the fund manager’s investing approach which holds the fund back in a rising market. Investors who refused to get deterred were rewarded over the years. The trick is to identify if its fall from grace been consistent.
If the fund has been consistently slipping in the performance charts for more than two years, it could be time to jettison it. For instance, take a look at DWS Tax Saving. After a fairly good performance in 2007, it consistently underperformed the annual category average for the next five years and currently holds a 2-star fund rating. In such cases, you would do well to park your assets elsewhere.
You may also need to sell your mutual fund for reasons other than underperformance. Read 5 reasons to sell your mutual fund to get a better understanding on when to bite the bullet.
