Last Updated on October 8, 2023 at 1:33 pm
In a two-part series, I would like to discuss how to spot (I) and how to handle (II) mutual fund underperformers. I write this after suggestions on twitter and by Kunal Lal.
The first step is to define underperformance. This is possible only if the right category of mutual funds is first selected for investment. Most investors do not do that. AMCs offers incorrect suggestions regarding investment durations and I have little confidence is the levels of understanding about investment risk among the ‘advisor’ community.
If I choose an equity fund and expect 15% return every year or 25% return after 3 years, the fault lies with me. I have discussed investment risk in multiple posts before and do not wish to do so again. Interested readers may consult: Equity investing: How to define ‘long-term’ and ‘short-term’.
Low expectation, not just reasonable, is the key to investment success. Especially for those who do not wish to understand how market fluctuations can be measured.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The second step is to ask, what is the role of a fund manager?
The fund manager of an actively managed portfolio has only one goal, beat the benchmark index. If the fund management starts to worry about star ratings, it is a sign that they have no process in place.
If possible, the benchmark for comparison should be the total returns index and not the price index. Here is an example: Sensex Total Returns Index as a Mutual Fund Benchmark.
Many fund managers manage to beat the benchmark by allocating stocks from outside the index (style impurity). This is an unhealthy sign of outperformance. Not easy to spot, more on this later.
The third step is to ask, ‘how long am I willing to give the fund manager time to beat the benchmark?‘.
If your answer is one year, I suggest you stick to index funds! I would recommend at least 3 years and a maximum of 4/5 years. My goals are decades away. So I have no problem with 5 years.
The outperformance should be consistent.
Before investing: the fund should have bet the index for most of the every possible 3/5 year period, say for the last 10Y. This can be evaluated using
Mutual Fund SIP and Lump Sum Rolling Returns Calculators
After investing: Give it at least 3 years to beat the index (total returns).
Beating the index cannot always mean spectacular outperformance. Sometimes, it can be less than 1%. It depends on too many factors: age of the fund, investment style, market movements etc.
If this has not happened, the reasons must be investigated. What kind of market are we in now?
Have funds with the same benchmark managed to beat the index? If I look at the rolling returns graphs, do I see a dip in performance?
How has the fund figured in your portfolio? What is the XIRR of the fund vis-à-vis the portfolio XIRR?. Read more:
How to review a mutual fund portfolio
How to Review Your Mutual Fund SIPs
Then the key question, ‘do you think the fund will recover?‘. This is a difficult question to answer and one needs to look at the stock portfolio.If you have faith, continue, else chuck it. I will discuss how to handle underperformers in the next post.
If I have enough expertise to do that, why would I choose mutual funds? There is also no way of knowing if an ‘advisor’ has such expertise.
If you are someone like me, incapable or uninclined of answering the above question, sticking to it if you have faith, else chuck it.
What matters is the ability to gauge the present health of our investment portfolio, not the future health of a mutual fund portfolio.
Part II: how to handle underperformers
Caution:
- Ignore opinions about the fund manager: ‘why did he pick this’, ‘why is holding on to this’ etc.
- Do not seek random opinions about what to do! Eg. from star ratings, Asan Ideas for Wealth etc.
- Having low expectations. This guarantees minimum disappointment and minimum portfolio management.
- Do not ditch your funds in favour of a fund that ‘everyone is talking about’
Announcement: Travel to Europe at 40-50% lower air fares!!
Pranav Surya just posted in AIFW that “Oman Air + Lufthansa are running a fantastic promotion for cities to travel from Delhi”. If you want to avail such huge discounts (eg. Delhi to Berlin only Rs. 23K) , follow the steps pointed out in our new book: GameChanger (Rs. 199 hardcover; Rs. 99 Kindle). Additional tips are available in the Travel Training Kit (Rs. 199)
Ask Questions with this form
And I will respond to them coming Monday. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you. PLEASE DO NOT POST COMMENTS WITH THIS FORM it is for questions only.
[contact-form][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Comment’ type=’textarea’ required=’1’/][/contact-form]
GameChanger– Forget Startups, Join Corporate & Live The Rich Life You want
My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want, co-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no kindle necessary).
It is a book that tells you how to travel anywhere on a budget and specific investment advice for young earners.
The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
You can Be Rich Too with Goal-Based Investing
My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.
The book is available at:
Amazon Hardcover Rs. 271. 32% OFF
Infibeam Now just Rs. 270 32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
Flipkart Rs. 279. 30% off
Kindle at Amazon.in (Rs.271) Read with free app
Google PlayRs. 271 Read on your PC/Tablet/Mobile
Now in Hindi!
Order the Hindi version via this link
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
![Follow Freefincal on Google News Follow Freefincal on Google News](https://freefincal.com/wp-content/uploads/2023/07/Follow-Freefincal-on-Google-News.jpg)
![Subscribe to the freefincal Youtube Channel Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.](https://freefincal.com/wp-content/uploads/2023/07/Subscribe-to-the-freefincal-Youtube-Channel.jpg)
![Follow freefincal on WhatsApp Channel Follow freefincal on WhatsApp Channel](https://freefincal.com/wp-content/uploads/2023/09/Follow-freefincal-on-WhatsApp-Channel-300x83.jpg)
![Listen to the Lets Get Rich with Pattu Podcast Listen to the Lets Get Rich with Pattu Podcast](https://freefincal.com/wp-content/uploads/2023/07/Listen-to-the-Lets-Get-Rich-with-Pattu-Podcast.jpg)
![Lets Get RICH With PATTU podcast on YouTube Lets Get RICH With PATTU podcast on YouTube](https://freefincal.com/wp-content/uploads/2023/08/Lets-Get-RICH-With-PATTU-podcast-on-YouTube-644x362.jpg)
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
![Pattabiraman editor freefincal](https://freefincal.com/wp-content/uploads/2019/11/Pattabiraman-author-freefincal-article-bottom.jpg)
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
![Both boy and girl version covers of Chinchu gets a superpower](https://freefincal.com/wp-content/uploads/2021/02/Article-bottom-Chinchu-gets-a-superpower-front-cover-for-girls-and-boys.jpg)
![Feedback from a young reader after reading Chinchu gets a Superpower (small version)](https://freefincal.com/wp-content/uploads/2021/02/For-bottom-Feedback-from-a-young-reader-after-reading-Chinchu-gets-a-superpower.jpg)
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
![You can be rich too with goal based investing](https://freefincal.com/wp-content/uploads/2016/11/You-can-be-rich-243x300.jpg)
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
![Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want](https://freefincal.com/wp-content/uploads/2017/05/2-mini-Cover-pink.jpg)
Your Ultimate Guide to Travel
![Travel-Training-Kit-Cover-new](https://freefincal.com/wp-content/uploads/2019/11/Travel-Training-Kit-Cover-new.jpg)