Timing Exit From Underperforming Fund

More often than not, when a fund in your investment portfolio begins to show signs of wilting or fading away from the limelight of growth, you may want to sell it. But what are the factors on which such a decision should be made? Could it be that it's just a slow phase in the fund's life with the possibility of a strong bounce-back? Or is the management to blame? The article lists the various reasons that you should consider before signing off from a poorly performing fund

All investments go through cycles but unfortunately, it’s impossible to reliably time these cycles and selling when an investment is in a downward cycle just means that you will miss the possibility of recovery. Consider a scenario when you had invested in small-cap-dedicated fund such as ABSL Small-Cap Growth Fund at the start of 2018. This is after the fund had generated return of more than 60 per cent in 2017. This was a very good year for the fund and it was tempting to think that the good times would continue. Now an investor’s ordeal starts as he sees the net asset value (NAV) of the fund starting to decline and continues to decline for the next 27 months. During this period an investor would have lost almost 44 per cent of his investment value.

This is a common investment experience for investors. However, it is more prominent in small-cap funds. These categories of funds can be very volatile compared to large-cap dedicated funds, and they can experience long periods of decline. This can be very frustrating for investors who may feel like they are making a mistake by staying put in the fund. The prolonged decline in the NAV of a fund, as experienced in the scenario of the ABSL Small-Cap Growth Fund, can test your patience and resolve. However, making a decision to sell a fund should not solely be based on short-term performance fluctuations.