When should you exit a mutual fund if it is not giving good returns?— Experts decode

Investing in mutual funds is a popular option today and there is a lot of discussion about what should investors do if their fund is not giving expected or good returns. Should they continue the SIP, pause SIP, or exit the fund altogether? Here is what experts suggest.

What to do when the mutual fund is not giving expected returns? 

According to Shweta Rajani, Head - Mutual Funds at Anand Rathi Wealth Limited, investments should not be done with a short-term perspective, especially with a time horizon of one year. However, if the fund is not delivering the expected returns post two years investors can do the following:

-Measure the impact of changes made in the portfolio by the Financial Manager

-Revisit the initial reasons for investing in the fund.

-Analyse the fund's performance in comparison to its benchmark and peer group

-Determine whether the underperformance is consistent or a temporary deviation. Evaluate the fund's performance over different time periods to identify any trends.

Sonam Srivastava, founder of Wright Research, suggests reviewing the reasons for the underperformance of the fund in a year or two. According to her, it could be market conditions or the fund strategy. She further suggests investors to consult a financial advisor before making a decision.

On the other hand, Shrinath ML, Senior Research Analyst at FundsIndia, suggests investors to have a timeframe of at least 5-7 years when investing in equities as they tend to be volatile in the short term (up to 5 years). He said that it is normal for any fund to underperform in the first few years due to equity markets in general not doing well or due to the fund’s investment style not playing out.

He added if the underperformance is due to these reasons, it is important to stick to the fund and continue with your investments.

Should an investor pause SIP if the fund is not giving good returns?

According to Srivastava, pausing SIP can be a strategic move if the fund is consistently underperforming. She suggests investors to be patient and analyse the fund's performance before exiting outright. 

Vinayak Magotra, founding member of Product, Centricity, also has a similar view where he suggested investors to start analysing the performance of the fund once they have done SIP for 3-5 years. 

According to Shrinath ML if there are red flags in multiple evaluation parameters, then investors can initially pause their SIP. If there is no improvement in the next 4-8 quarters, then they can exit the fund.

When should investors reconsider staying invested in the mutual fund? 

According to Srivastava, reconsideration should occur if the fund consistently underperforms its benchmark over a long period, or if there is a significant change in the fund management or strategy. She added regular portfolio reviews are essential to assess if investors’ investments align with their goals.

How long should investors stay invested in a mutual fund which is not giving expected returns?

Rajani suggests investors to stay invested for at least two years and understand if the fund performance is in the right direction or not.

According to her, investors should check both quantitative and qualitative parameters at the same time before taking an exit call.

Quantitative Parameters may include comparing the fund's performance with the peers and how long has the fund been underperforming 

Qualitative Parameters may include: 

-If there is a change in the fund manager and the track record of the new fund manager is not promising. 

-If the Asset Management Company (AMC) is facing uncertainty – either looking at exiting the mutual fund business or too many changes in management. These need to understand the track record of the new AMC and the management before taking an exit call.

-If the fund is undergoing a change in its investment strategy which could impact its return potential. This is again a trigger to evaluate if the new scheme objectives meet the investment objective

However, the decision to exit should be taken after taking into account the above as well as calculating for exit loads, and tax implications as most funds have a one-year exit load, and exiting a fund before a year would call for short-term capital gains.

Magotra suggests that an investor has stopped SIP,  they can exit the fund over 6-12 months depending on the exit load and tax applicability.

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