Most individuals invest in mutual funds as it generates higher returns, vis-à-vis other investment products such as bank fixed deposits. Plus, it is more secure than directly investing in equities through stock markets.
However, at times mutual funds may often fail to achieve this fundamental objective. This might make you wonder whether you should continue to remain invested or pull out of your mutual fund investments. So, what do we do when an equity fund underperforms?
Find the reason for such underperformance
It is important to find the reason for the underperformance of your fund. Some of the major reasons include:
- Change in fund manager
- Wrong fund management style
- High expense ratio
- Merger and acquisition of the fund
What should you do if your equity mutual funds underperform?
Here’s what you can do under the circumstances your equity fund underperforms:
Stop panicking and stay invested
This advice is for those investors who are planning on investing for a long-term. The market witness volatility and might go up and down. However, in the long run, it is likely to perform better and offer good returns. In the short term, your portfolio might lose shine and even drop in value due to volatility.
If you have a longer time investment horizon of, say, 7~10 years, don’t get disheartened by lousy news and continue to stay invested. You are bound to recover your notional losses and make better returns on your mutual fund investments.
Avoid redeeming your mutual funds
Several investors make the mistake of redeeming their funds when the markets are dropping. They think it is better to exit the markets at this stage and re-enter when the market shows sign of recovery.
But, they tend to forget that it is almost impossible to time the markets. Also, remember the losses you incurred are notional losses unless the investments are redeemed, which then becomes actual losses.
Remember that even highly victorious fund managers can underperform over the short duration or medium-term. Yet, if their fund management approach is sound, they are bound to deliver significant returns in the long-run. However, the ‘buy and hold’ approach does not work each time in case of mutual funds.
Conclusion
Sometimes, it is essential to ditch a mutual fund after a period of consistently poor performance and returns. However, you should take this call only after convincing yourself that there is more to blame for the underperformance of the equity fund than just a temporary bad phase. Happy investing!