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Mutual Fund: Should I get rid of schemes if they under perform?

One can give the benefit of doubt to products that have started losing their value only recently



The contrast is striking. Especially, since the market has started falling. The return from some of the mutual fund scheme has been offering for sometime now is disturbing.



Some fund manager is severely underperforming his peers. For example, take a look at the gainers and losers, the top performing fund in the diversified equity scheme category has returned around 66% in the past one year, whereas the worst performer in the category has given a negative return. Index scheme category has given an average return of around 25% in the last one year. Worse, even debt schemes have performed better than these losers. Shot-term debt funds, for example, has offered around 8.4% returns to the investors in the last one year.



One really don’t understand how these schemes can lag so far behind the best in the category. How can any fund manager justify his fee, when he is underperforming even debt schemes? Even index scheme is outperforming means the fund manager is really dumb. There is no simple answer to this question. You have to monitor the scheme for a while and look at its portfolio before making final decision. After these two steps if he thinks there is no valid justification for such severe underperformance, he can get rid of the fund.



The decision making is not an easy task. That is why he called up to ask what the strategy suitable to deal with such situations is. But the questions were: should one get rid of a scheme if it severely underperforms its peers for a few weeks? Or should one really look behind the reasons for the underperformance before getting rid a laggard? Investment experts believe that one should always give a reasonable period of time for the scheme before deciding to redeem it. What the reasonable time is varies from people to people. For some, it is three months and others are more lenient; they would give six months. The first step is to start monitoring the scheme’s performance vis-à-vis its peers.

But always remember one point: you should compare only schemes within one category. If the scheme continues to perform badly for, say, six months. Then, look at its portfolio to figure out what is its investment strategy. If the fund manager has taken a defensive position, give him some more time. Otherwise, just dump him; he is not worth the fee you are paying.



You should deal with perpetual laggards severely. Certain themes and specific schemes have failed miserably to deliver. Such schemes should be punished.



For example, Birla Opportunities (incidentally, the biggest loser last week) haven’t performed well at all. The same applies to themes like contra, dividend yields. Well, if you have invested in any of these themes, go ahead and dump it without much trepidation. That was for perpetual laggards. What about schemes with an envious past record, but started underperforming only recently. Also, what if they are still average performers? For example, what about an HDFC Tax Saver, which started underperforming only in the recent past? But still the benefit of doubt can be given to these schemes. They have weathered many a storms and they have never deviated from their original mandate. And sure if you look at the long term performance, they wouldn’t be in the bottom 10.

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