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My fund isn't performing - should I make a switch?

By Finserv MARKETS - Aug 27,2019
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My fund isn't performing - should I make a switch?


Mutual Funds are investment instruments wherein a number of investors with a common financial goal invest capital. The pool of money is maintained by a fund manager who then invests the sum into company stocks, shares and bonds.

One of the primary benefits of mutual fund investments is the diversification of risk: a typical portfolio will hold many securities. This diversification ensures that the dip in the price of one or even a few securities does not have an adverse impact on the overall portfolio performance. The investors with similar financial goals pool their funds so that the fund manager can invest them optimally to achieve those goals. Fund managers will try their based to invest prudently based on the price, quality, risk, financials, news flows and economic developments. On a large portfolio, mutual funds end up reducing costs, reaping the benefits of economies of scale.

Mutual funds are developed with objectives that determine the level of risk they operate at and are regularly tracked for performance. In addition to the greater scrutiny, mutual funds are regulated by the market regulator Securities and Exchange Board of India (SEBI).

There’s no gainsaying that mutual funds investments are more positively positioned to bring good mutual funds returns over a period of time. However, the performance of these funds is dependent on a lot of factors outside the control of the fund manager. These funds are exposed to the twists and turns in the market. Thus, even though the fund managers may make an informed decision about the choice of securities in the portfolio, the varying market conditions have a strong role to play in the scheme’s performance and ultimately, mutual fund returns.

That said, it is imperative to measure the performance of these mutual funds investments against your expectations over specific time horizons – the long term for equity mutual funds, medium-term for hybrid funds or very short term for liquid funds. When you open an account for the same with Finserv MARKETS, you get detailed portfolio summaries and insights into the performance of your investments. You also get financial planning tips and investment advice in just a few clicks. Empowered with information, you can assess better the likelihood of the fund being able to fulfil your goals. If your mutual fund investments are not performing in keeping with your expectations, you may be tempted to consider the option to switch.

What is switching?

Switching refers to moving either a portion or the whole of mutual funds investments from one scheme to another. Simply put, when you are not happy with the performance of your funds and are convinced that these don’t serve your financial goals, then you may want to change the destination of your investment. To find a better destination for parking your funds, you may want to peruse the Scheme Factsheets and Key Information Memorandum before investing. If you need detailed information then you should look at the Scheme Information Document.

To make a switch request, you just have to fill up a transaction form or write to your fund managers to intimate them of your switch request. All the details should be mentioned: the scheme name, plan and the option into which the units are to be switched. The catch is that switching is not a decision you can take on a whim: the transaction related to the switch is subject to exit load and capital gains tax as applicable. Therefore, before you go ahead with the switch finally, it is important to ask yourself – is the fund’s underperformance so final that switch is the only way to escape losses?

A frequent reason for changing a fund is a disappointing performance. As an investor, you are likely to come across such a situation at one time or another. The reason for underperformance could be attributed to mediocre market conditions, unreasonable expectations or poor fund performance even under good market conditions.

If a fund is underperforming due to the overall market conditions, then it is likely that other funds in the market are also equally, if not more, affected. In such a situation, pulling the plug and going for the exit load may not be a good option. On the other hand, if the fund is performing badly in perfectly good market conditions, then investors should first review it in its category, examine its performance and average against the benchmark of the category. If it is underperforming in both these parameters in the previous two years, then it is time for switching.

The key is to assess the fund performance by looking at other funds in the relevant category and looking at the standard benchmarks under that category. If it is your expectations that were unreasonably high, you could just manage your expectations. But if there is a genuine problem with the performance of the funds, then you should look at switching as an option.

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