image title

What to do with Non-Performing Mutual Funds?

Jagrity Sharma Jagrity Sharma 26 August 2019

Mutual funds are generally well-diversified to control potential losses. However, investors should keep track of the fund performance and have an exit strategy in place, if the fund is consistently underperforming.

image title

A mutual fund is an excellent way to invest in companies across different industries with high growth potential and helps you to grow your wealth over a period of time. As the mutual funds invest in various companies, its performance is linked to the overall performance of the companies the fund invests in.

The performance of the mutual fund scheme also depends on how efficiently the fund manager chooses the stocks depending on the investment objective of the scheme. While some mutual fund managers may follow the value-style of investing, some follow the growth-oriented strategy. The assets they invest in vary from one mutual fund scheme to another and may include a mix of equity, debt, and money market instruments.

Every mutual fund scheme follows a different investment strategy, and it isn’t wise to treat it like any other investment instrument. It is often observed that many investors treat mutual funds like a fixed deposit. They think that once they have invested money in the mutual fund scheme, they need not review it and tend to forget about the investment. However, this mistake comes to light when they have a look at the investment portfolio after few years, mostly when they want to redeem the units and realise that they had been holding some non-performing mutual funds all along.

A non-performing fund is the one that has been consistently under performing as compared to its benchmark and peers. This means that your mutual fund scheme was unable to provide satisfactory returns over a while. While no scheme, even best performing mutual funds may not outperform the benchmark every time, consistent poor performance is a sign of underlying issues with the quality of fund management.

The under performance of the mutual fund over a short-term can be due to market volatility or possibly because the fund manager may have taken a different bet than the market. It may take time for the mutual fund to overcome volatility, and the fund manager’s strategy may take some time to show results. Hence, there is nothing to worry if a mutual fund scheme is under-performing due to these reasons.

However, if your mutual fund is under-performing repeatedly due to one of the following reasons, it is a sign of the poor quality of mutual fund management, and you need to deal with it carefully.

  • Lack of process-driven approach
  • Lack of a robust risk management system
  • Inadequate skills and performance of the mutual fund manager

Another reason that can lead to non-performance mutual funds in your portfolio is not following the right technique to select the right fund. Investors, on many occasions, choose mutual fund schemes based on ratings or on the recommendations of relatives and friends who may not be equally competent. It is not wise to look only at the rank of a mutual fund scheme for the selection purpose. Star ratings of the fund indicate how the fund has performed compared to its benchmark over the past few years. It does not depict the future growth potential of the fund in any way.

As an investor, you need to review your mutual fund portfolio to find under-performing mutual funds as well. You can evaluate your portfolio by examining the points mentioned below:

  • Compare the performance of the fund across different market phases using qualitative and quantitative factors.
  • Check whether the scheme is aligned with your risk profile, investment objectives and time-horizon.

If the fund has undergone minor changes, you can compare the scheme using past performance. However, if the fund suffers due to significant changes, such as asset allocation and investment strategy, a comparison using the past performance may not be worth. If in your current portfolio, some of the funds are not performing well, you should review those investments. You should redeem the non-performer funds in your portfolio in one go instead of partially redeeming them.

Best performing mutual funds in 2019

Below is the list of best performing mutual funds based on their five-year returns.

Equity Large Cap

Fund name5-year return
JM Core 11 Fund17.42%
Reliance Large Cap Inst17.03%
Reliance ETF Junior BeES16.83%

Equity large and Midcap

Fund name5-year return
Mirae Asset Emerging Bluechip Fund – Regular plan 25.48%
Canara Robeco Emerging Equities Fund – Regular Plan24.91%
Principal Emerging Bluechip Fund21.14%

Equity Multi-Cap

Fund name5-year return
SBI Focused Equity Fund18.72%
Kotak Standard Multi cap Fund – Regular Plan18.65%
Quant Active Fund18.57%

Equity Small-Cap

Fund name5-year return
SBI Small Cap Fund27.81%
Reliance Small Cap Fund24.89%
Franklin India Smaller Companies Fund20.58%

Equity ELSS

Fund name5-year return
Quant Tax Plan20.12%
Aditya Birla Sun Life Tax Relief 9618.36%
Tata India Tax Savings Fund18.22%

Debt Fund – Medium to Long Term

Fund name5-year return
ICICI Prudential Debt Management Fund9.35%
ICICI Prudential Bond Fund - Institutional Plan8.79%
SBI Magnum Income Fund8.43%

Debt Fund – Short Term

Fund name5-year return
Franklin India Short Term Income Plan - Institutional Plan9.63%
Franklin India Short Term Income Plan - Retail Plan9.21%
Aditya Birla Sun Life Short Term Opportunities Fund8.49%

Aggressive Hybrid Fund

Fund name5-year return
Tata Retirement Savings Fund - Moderate Plan - Regular Plan18.5%
HDFC Hybrid Equity Fund16.02%
Canara Robeco Equity Hybrid Fund - Regular Plan15.25%

If your mutual fund scheme is under-performing against its peers and the benchmark is for a year or more, you should try to figure out the reason behind it. Sometimes a fund manager may go against the market-accepted wisdom and take adverse calls. This may sometime result in lack of performance during the short period. If you find your funds consistently non-performing, you should redeem your investment and shift the money to a better-performing mutual fund scheme. It is advisable not to stop your SIP, take your investment out of the scheme and put it in a best performing mutual funds.

Recommended Read: Should You Invest in International Mutual Funds?

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!