Questions To Ask Your Mutual Fund Adviser If Your Schemes Underperform
May 20, 2019

Author: Divya Grover

(Image source: Image by Gerd Altmann from Pixabay)

We invest our hard-earned money in mutual funds with the expectation of higher returns as compared to other traditional investment avenues. Through our investments we hope to reach our much coveted financial goals.

Naturally, it's painfully disappointing when we see that our investments have performed below expectations. One common mistake investors make at such times is to panic and become unsure about continuing with the scheme.

But redeeming the scheme/s in panic when it starts to underperform is not the right-approach because investments need time to grow and generate meaningful returns. So, instead of making any hasty decisions, approach your investment adviser and ask the following questions:

  1. Reason for underperformance

    It is important to delve deep and find out the actual reason for underperformance. Underperformance does not always mean it's time to exit because even carefully selected fund can underperform.

    Of the many reasons that cause a scheme to underperform, some factors include, but are not limited to, market volatility, changes in the fundamental attributes, or investment objective of the scheme.

    Sometimes various micro and macro-economic factors can induce a bear phase to set in for a while, but the market situation does improve over time. The changes in fundamental attributes of the scheme can also create some volatility in the short-term, but in some cases this proves to be beneficial at a later stage.

    When there are changes in fundamental attributes or investment objectives, the scheme/s allows its investors to exit within a specific period without any exit load.

    Some schemes like value-style fund select stocks when they are undervalued. These stocks though undervalued have strong fundamentals and require few years to show decent growth. Hence, these schemes will be volatile in the short-term and it will be wise to wait for few years to determine its true performance. No fund can underperform or over-perform every time, so check if the schemes have performed consistently well across market phases.

    [Read: Why To Evaluate Mutual Fund Performance Across Bull And Bear Market Conditions]

  2. Benchmark/peer performance

    It could be that your scheme isn't the only one that has underperformed; the entire market could be going through a bearish phase. Therefore, the primary thing to do is to compare the fund with the performance of benchmark and other funds in the same category (peers).

    If the fund has underperformed, but the benchmark index and the funds in the same category have performed well, it could be indicative of other underlying investment issues in the scheme and you may need to sell the scheme.

    If the performance of the scheme has fared comparatively well as compared to benchmark and/or peers, simply continue with the investment.

    Here's the catch, if you exit the scheme without comparing the benchmark performance, it may happen that your earlier scheme makes a comeback with better returns and the scheme you switched to starts underperforming.

    [Read: Here's Proof Why The TRI Is A More Meaningful Mutual Fund Benchmark]

  3. Should you switch?

    Underperformance of the scheme may raise the question if the fund is right for you, and if it is not, you may have to start searching for better alternatives. Ask your financial adviser the rationale behind recommending the scheme and assess if the scheme still holds true to the rationale. This may include efficiency of the fund manager, risk-reward ratio, rolling returns, etc.

    Consult with your adviser on the right time to look for better alternatives. These alternatives can be a different scheme within the same category or a different category. If the adviser recommends that it is not the right time to switch, ask how long you should continue with scheme and set realistic expectations.

  4. Need for change in strategy

    Changes in market conditions may warrant a change in your investment strategy. For example, if at the time of your investment a particular sector had good future prospects, but a change in industrial policy has dimmed its prospects, there might be need to move away from the scheme which has high concentration to the particular sector. Therefore, check with your adviser to know if a change in strategy is required.

    This will entail additional research and a review of your portfolio to identify any potential risks that may exist. You may be required to shift to a higher or lower risk option if the situation demands.

    [Read: Have You Planned A Strategy To Invest In Mutual Funds In 2019?]

A sailor does not abandon ship when the tides are rough but sails through the tides to take the ship to safe harbour. Similarly, a good investor should not be bothered by the short-term fluctuations and give their investments a chance to work towards clearly defined goals.

You should sell the scheme only in following cases-

  1. You have met your financial goal

  2. You need to rebalance your portfolio

  3. Your mutual fund scheme has been consistently underperforming

  4. Changes in the fundamental attributes or investment objective of the scheme is not aligned with your objective

  5. You find a better research-backed alternative

[Read: When Is The Best Time To Sell Your Mutual Fund?]

Market and volatility go hand-in-hand. If you stay invested for the long-term by selecting a research-backed scheme and ensure that your portfolio is well balanced, you will be prepared to offset market volatility. Review the performance of your portfolio at least once a year. If the scheme's performance is consistently below par as compared to its benchmark and peers, it may be time to switch to a better scheme.

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