- 1. Consistent Poor Performance
- 2. Style Drift (Changing the Rules)
- 3. Low Risk-Adjusted Returns (Sharpe & Sortino Ratios)
- Conclusion
Investing in mutual funds is a great way to build wealth, but not all funds perform well forever. Sometimes, investors realise too late that their money is stuck in a scheme that isn't working for them.
How do you know if your fund is the problem? Here are three simple indicators to help you decide if you are stuck in the wrong equity fund.
1. Consistent Poor Performance
The most obvious sign is when your fund fails to beat the market.
Every mutual fund has a "Benchmark" (like the BSE 500 or Nifty 50) against which its performance is measured.
- The Red Flag: If your fund has consistently delivered lower returns than its benchmark and its category peers over 3, 5, or 7 years, it is underperforming.
- Real Example: Look at the data table above. In the 5 years, the fund gave a return of 16.86%, while the Benchmark (BSE 500 TRI) gave 20.68%. If a fund consistently lags like this over long periods, it may be time to reconsider.
2. Style Drift (Changing the Rules)
When you buy a fund, you buy it for a specific objective (e.g., investing in safe large companies). However, sometimes funds change their investment strategy midway. This is called Style Drift.
Example:
Take the case of the Nippon India Multi Asset Allocation Fund (formerly Nippon India Multi Asset Fund).
- The Change: The fund changed its investment philosophy. It added Silver ETFs to its portfolio and increased its maximum debt allocation from 20% to 35%.
- Why it matters: If you invested in this fund for a specific asset mix, and the fund changes its structure to something that doesn't match your risk appetite or goals, you might be in the wrong fund.
3. Low Risk-Adjusted Returns (Sharpe & Sortino Ratios)
Returns aren't everything; you also need to check how much risk the fund manager took to get those returns. This is where technical ratios come in.
- Sharpe and Sortino Ratios: These numbers tell you how much return the fund generates for every unit of risk taken.
- The Rule: A higher ratio is better.
- The Check: Compare your fund’s ratios with other funds in the same category. If your fund shows lower risk-adjusted returns than its peers, it means the fund manager is taking high risks but not delivering enough profit to justify it.
Conclusion
It is important to review your portfolio periodically. If your fund is consistently underperforming its benchmark, changing its fundamental strategy (Style Drift), or showing poor risk ratios, it might be time to consult a financial advisor and switch to a better option.
Disclaimer: The content is meant for education and general information purposes only. Past performance is not indicative of future returns. Mutual Funds are non-exchange traded products, and INDstocks is merely acting as a mutual fund distributor. All disputes with respect to distribution activity, would not have access to the exchange investor redressal forum or arbitration mechanism. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948 BSE RA Enlistment No. 6428.