Mutual fund investment is a popular and reliable way to grow wealth over the long term. However, when your funds underperform, it can be a cause for concern. As an investor, you may feel anxious and wonder if you made a mistake by investing in those funds. But before you start panicking, it’s important to understand the reasons why your funds may be underperforming and whether or not you should be worried about it.
Assess The Performance Of A Mutual Fund
It is important to remember that all investments come with some level of risk and none can guarantee a return. There will always be a phase of underperformance. In fact, some of the best-performing Best personal wealth management firms in india have also gone through an underperformance phase once in their lifetime.
Since, even most profitable mutual funds are market linked investments and their performance is based on market fluctuations. Therefore, it is important to keep monitoring your fund’s performance on a regular basis. You can do so by breaking down the fund’s returns over the last few quarters and benchmark it against index performance. You can also compare the performance with funds that are falling under the same category.
If your fund is underperforming the benchmark, you can hold onto it. However, if your fund is consistently underperforming, then you should consider pulling out of it.
Evaluate The Possible Reasons For Underperformance
Once you have monitored the performance of your fund, the next step is to find out the reasons for its underperformance. Some of the possible reasons can be :
- Change In Fund Manager – Sometimes change in the fund manager adversely affects the performance of funds. Each manager has his own style of managing portfolios. The new fund manager may have a different strategy of choosing stocks and may need some time to deliver the performance same as the previous one.
- Approach To Fund Management – The underperformance of a fund can also be due to the approach to fund management. The way an aggressive fund management approach can deliver in a bull market, similarly a defensive approach works better during a bear market.
- Investment Timing – The timing of your investment can also cause the fund to underperform. For example, when you invest in funds when valuations were at peak, you may be getting unsatisfied results.
- Acquisition Of Fund – Acquisition or merger of a fund by another fund house can adversely affect the fund’s performance. This may lead to both change in the fund management team and the investment goal of the scheme. This may result in refraining several investors to either refrain themselves from investing further or pull out of the fund, thereby leading to fund underperformance.
Actions To Take
The key to determining whether or not you should be worried about your underperforming funds is to consider how long they have been underperforming. If the underperformance has been consistent over a long period, say a year or more, then it may be time to re-evaluate your Top wealth management firms in india investment strategy. On the other hand, if the underperformance is recent, and the fund has a strong track record over the long term, then it may be too early to worry.
- A significant factor to consider is the market conditions. The performance of even most profitable mutual funds is closely tied to the performance of the underlying securities they invest in. If the market is down or experiencing volatility, then it’s likely that your funds will also experience a dip in performance. However, if the market conditions are favourable, and your funds are still underperforming, then it may be a sign of a larger problem.
- If your fund manager has changed, then monitor the track record of the schemes managed previously by the new fund manager. If the track record shows good results, then there is nothing to worry.
- It’s also important to consider the fees associated with your funds. High fees can eat into your returns and impact the performance of your funds. If your funds are consistently underperforming, and you’re paying high fees, then it may be worth considering other funds with lower fees.
- If you’re still unsure whether or not you should be worried about your underperforming funds, then it may be a good idea to consult with a financial advisor. They can provide you with personalised advice based on your individual financial goals and circumstances.
Bottom Line
In conclusion, while underperforming funds can be a cause for concern, it’s important to approach the situation with a level head and consider the factors mentioned above. Remember that all investments come with some level of risk, and there will always be periods of underperformance. If the underperformance has been consistent over a long period, or the fees are high, then it may be time to re-evaluate your investment strategy. But if the underperformance is recent, and the market conditions are favorable, then it may be too early to worry. In any case, it’s always a good idea to seek professional advice if you’re unsure.