Criteria for underperforming mutual funds
I am a 63 year old retired person. My equity exposure is limited only to mutual funds. Earlier a fund manager was taking care of my portfolio. Now that is not the case and I am looking over my own portfolio.
My question is on what basis should I remove or stop adding to funds which have been underperforming?
I can understand your situation. I heard my father saying the same things in 2013.
I’ve few practical suggestions for you (out of my own experience):
- Start by comparing the fund with the right benchmark and similar funds (same category). If it has been consistently underperforming for 2–3 years (not just a few months) that’s a warning sign.
- Also, check if the risk taken (volatility) is higher, but returns are still lower; that means the fund isn’t rewarding you properly for the risk. You can simply compare the fund’s return and its “risk ratio” (like Standard Deviation or Sharpe Ratio shown on ValueResearch) with similar funds. If the risk values are higher but the returns are lower than peers, it’s not performing efficiently. I personally like the Sharpe Ratio metric.
Next, you can look at changes within the fund itself.
- A change in fund manager: If performance becomes inconsistent or weaker after the new manager takes over, it may be a sign to review or exit the fund.
- A shift in investment style: If the fund no longer follows its original strategy (for example, moving from large-cap to mid-cap risk), and this doesn’t match your comfort level, it may be time to reconsider holding it.
- A growing fund size can impact performance: If the fund becomes too large and starts struggling to generate earlier levels of returns, it may indicate reduced efficiency and a need to review your investment.
But above all of this, it is important for equity investors not to take decisions in a hurry. As per my experience, what looks like a logical decision today may not sound as strong tomorrow. So always give yourself time, especially when the mood is to sell the holdings.
