When do advisors ask their clients to sell mutual fund schemes?
They would tell you which schemes to invest, but most of them would never tell you when to sell a badly performing `big’ mutual fund scheme. You would hear similar complaints from mutual fund investors these days, as many iconic funds are struggling to keep pace with their benchmark and indices.
Investors would point out how their advisors struggled to offer a concrete answer when HDFC Equity Fund, the largest mutual fund scheme in the country, was performing badly for a year or two. Many advisors are tight-lipped about the underperformance of other icons like DSP BlackRock Micro Cap Fund or ICICI Prudential Value Discovery Fund. ET.com Mutual Funds spoke to some mutual fund advisors to find out how they approach the issue of dumping the bad performers.
Prashant R Shah, Director, Integrated Wealth Management:
One year of underperformance by a scheme should immediately put it in the red zone. After that you have to closely monitor the reasons and the kind of churning the scheme is doing. We have to look at the overall standard deviation of the scheme viz-a viz the market.
If a scheme has been a consistent performer, we need to give it a chance. We need to get into the reasons of its underperformance. Some fund managers would say that they are taking a contra call which might work out. In this case, it depends on the investor’s goal to exit or stay.
If the goal is six to seven years away, then we can stay and wait for the scheme to turn around. If the goal is less than five years away, we need to exit after one and half years of underperformance. Recently many people started speaking about balanced funds and the risk that they carry. The investors who cannot take the risk of investing 70 per cent in equities should move out of the riskier balanced schemes.
It is not about the returns all the time. Recently, DSP BR Microcap Fund started underperforming. It has been a great scheme so we are still waiting for the fund manager to do something about the performance. You can’t expect a scheme to perform every time. There will be bouts of volatility, depends how much you can take.
Pankaj Gera, Certified Financial Planner:
If the scheme has underperformed its benchmark and the category for one year, we put the scheme under watch. Looking at the returns in isolation isn’t a good idea. Also, until the scheme is returning lower returns than the benchmark, you can’t say that it is underperforming.
If there is a scheme that has been performing consistently for a long time and then starts underperforming, automatically the trust level in the scheme is more so we give it some more time. However, not more than a quarter. We need to understand where the underperformance comes from. If the reasons are valid, we hold on. For example, regarding ICICI Prudential Value Discovery Fund, we knew that the underperformance is because the fund manager took a call on the pharma sector. It was a call gone wrong.
We can’t expect a fund manager to be accurate on all the times. So every underperformance shouldn’t let you get out of your scheme. Now, the important point is that, if my goal is achieved by an average return of 12 per cent and the fund maintains that till date, you need to think about it twice, give the scheme some time. If your goal is near and the returns are going down, get out. The maximum time you give to any fund, be it a once top performer is one and a half or two years and a minimum of one year.
Vivekh Pathak, Certified Financial Planner:
There are times when a fund is not performing as good as the other in the same category. In such cases, you need to check how much risk the fund is taking. If the risk-return ratio is inclined towards the returns, then things are fine.
Secondly, If the investments are done via SIPs, we will probably wait for a longer duration. So, we may take a call to move out in one year if we invested a lumpsum but for SIPs we might give two or three more quarters.
If there is a change in the fund manager, we need to keep a close track because it can impact the performance of the fund. If the new fund manager has a good track record, then we would give him/her a while to get the scheme’s mojo back.
Also, if there is a change in the basic attributes of the scheme, we shouldn’t wait at all. If you invested in a midcap scheme and due to its size, it is now tracking the largecaps, it might impact your goals. On the contrary, if a conservative scheme starts to invest aggressively, you need to move out.
With Prashant Jain’s funds, there were times when the schemes didn’t perform for more than two years. But some people had the conviction that he is taking a long-term call, which happened. The scheme rose 5 per cent in a single day. But it is a difficult call as a planner. We sometimes can’t change the fundamental rules and we have to act.
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Via:: Economic times – Wealth