What to do if the mutual fund under performs?

K. ARAVIND

We invest in mutual funds with the goal of gaining more than the stock index. This is why portfolio management attracts investors with funds that offer returns based on excellence. While some funds perform better than the average of the funds in the category they belong to, the performance of some funds is the exact opposite. When evaluating performance, we can also see funds that have performed lower than the index (benchmark). Should investors switch from one fund to another on the basis of profit?

Long-term investment does not mean staying in one fund for too long. In order to ensure the best return on investment in the long run, it is necessary to evaluate the performance of the invested fund over a period of time and decide whether the fund should change based on it. But the next question is how to assess the performance of the funds.

The performance of a fund is often evaluated by comparing it with its category average and index. Experts say comparing it to the index is the right way to go. They say that it should not be a big deal if the fund continues to gain more than the index, even if it returns lower than the category average in a few quarters.

Earlier, rating agencies used different criteria to decide which category a fund should belong to. A fund can be seen by different rating agencies in different categories. This method has now changed. SEBI has clearly defined the categories and the fund houses have adjusted the schemes accordingly.

An assessment compared to a category average may not always be accurate. Indexes (benchmarks) of funds belonging to the same category are also found to be different.

When should the withdrawal from one fund and the investment be transferred to another fund? Experts point out that if the return of the fund is two to three per cent lower than the benchmark for three consecutive months in a year, switching to another fund may be considered. It is necessary to check whether the performance decline is due to the change of fund manager or the transfer of funds to another fund house.

The expense ratio of low return funds should also be considered. Increasing the expense ratio may adversely affect the return. It is advisable to opt for and invest in high asset flagship schemes of asset management companies.