When should you exit a fund?

When you invest in an actively-managed fund, you must not fall in love with it as circumstances diarise that force you to part ways with it. It is quite possible that a fund you chose for its stellar past performance may underperform in the future, forcing you to exit it. Sometimes, the fund’s performance may be as expected it, but you may need to sell because your needs have changed. The fund manager who was at the helm may have moved to another fund house. The fund’s asset under management (AUM) may have swelled, affecting performance.

- Sudipta Mitu

How to evaluate a fund’s returns

Experts say that you should not penalise a fund for short-term underperformance. So, look up the trailing returns of the fund over a five- or seven year horizon. Over such a period of time, the fund would have undergone both a bull and a bear market. Compare the fund’s performance with its benchmark and category average return. If it is underperforming, put it on your watchlist.

In addition to trailing returns, also look up calendar year wise return over the past five or seven years. This will tell you whether the underperformance is a recent phenomenon or a sustained one. If it is a relatively short term phenomenon, you should be patient with the fund. The calendar year wise breakup of performance will also tell you how the fund performed in both rising and falling markets.

Before you decide to sell a fund, you also need to find out the reason for its underperformance. A lot of times, a fund underperforms because the market does not support the investment style that its fund manager pursues. In India, for instance, value-oriented funds underperformed for many years. But over the years past six months or so, this style of investment made a comeback. If an investor had moved out of a value fund while it was underperforming, he would not be there to benefit from its rebound.

When the fund manager changes