Mutual funds (MFs) are an attractive investment option for many individuals. They offer attractive returns over a long period of time. But these investments are also subject to several risks such as inflation, volatility in the global market, credit and liquidity issues and much more. These risks can cause your mutual fund investments to suffer losses. While many people exit their MFs at the first sign of trouble, there are some things you need to keep in mind before you make changes to your investment portfolio.
Investors should keep the following things in mind when it comes to mutual funds:
- There will be ups and downs in the short term. The MF’s volatility will depend on the sector and category it will be in. For example, small cap MFS will be significantly riskier than mutual funds in the long-cap sector.
- The past performance of a mutual fund should not be the only criteria for investment. Check the returns across different time periods. Look if the mutual fund is performing poorly compared to others in the sector or if the stock market in general is suffering losses.
- Check if the mutual fund’s performance has been inconsistent in the past. If so, try to find out the reasons behind it. Underperformance means that the mutual fund has performed poorly compared to its benchmark and category average for at least two consecutive years.
- Talk to your investment advisor about the mutual fund’s underperformance before taking a final call. You also need to discuss if the fund has a chance of recouping its losses or if it will consistently perform below expectations.When should you exit a mutual fund?
- You should take your financial goals, appetite for risk, changes in regulations, general market conditions and more into account before thinking about your exit from the mutual fund.
- Generally, you should exit the fund after it has underperformed its benchmark consistently over an extended time period e.g. 1-2 years.
You can transfer your investment into a similar fund with a proven track record. But before making any investments, you need to research the scheme thoroughly.
For best returns, it is better to have a diversified investment portfolio, with a mix of mutual funds, term deposits and other options.
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