personal finance

Is it the right time to cut off long-term laggards from your mutual fund portfolio?


The market has corrected sharply in the last two weeks. S&P BSE Sensex, the key stock market index most individual investors track, lost around 30% during in the fortnight. Many investors want to know whether they should use the crash to weed out losers from their mutual fund portfolio. They reckon that being in a scheme with a better track record would help them to make up for the losses when the market starts reviving. Is it a right strategy?

“There have been many schemes which have been underperforming even before the market started tanking. We asked investors to get out of some schemes, and some we held and gave extra time because of their good past performance. We should get out of these schemes independent of the market situation,” says Vishal Dhawan, Founder, PlanAhead Wealth Advisories, in Mumbai.

Some other mutual fund advisors believe that if you haven’t taken a call on the laggards till now, you can do it now. However, you should be extremely careful while choosing the schemes you want to get rid of. They say, investors shouldn’t look at the last one year’s performance while taking a call on the laggards. Investors should also not compare the performance of their equity schemes to other asset classes which are doing better at the moment.

Do not go by the schemes that gave you poor returns last year or so. “There is a chance that the schemes which have been lagging behind their peers in the last couple of years have handled their downside well at this point. Speak to your planners, don’t take an uninformed decision,” says Deepali Sen.

Mutual fund advisors and financial planners ask investors to stay away from the trap of weeding out categories that have been doing badly for a while now. For example, value fund category that has been faring poorly in the last two years, many schemes with outstanding reputation like ICICI Prudential Value Discovery Fund and Quantum Long Term Equity Value Fund which have been lagging struggling for a long time.

Mutual fund advisors say investors should have clear plan when it comes to dealing with categorises like value fund. They say investors should take a call whether they wan tot be in in the category at all. They point out that when an entire category is down, you can’t put the blame on one scheme and move to another.

“If you want value scheme, don’t get out of these schemes. If you have too much allocation to value schemes, you may cut some and move to growth. My simple suggestion is if you want to cut off a laggard, move to a better scheme in the same category. If an entire category is down, don’t do anything,” says Vishal Dhawan.

If you scheme has been constantly lagging behind its peers, it makes sense to cut that scheme off. It matters less if you have incurred losses because you will buy cheap at this point. However, remember, don’t go from a smallcap to a multi or large or a debt fund unless you believe you can’t take the risk and had made a bad call earlier.

Gaurav Mong, Director, PxG Consultants, a wealth management firm based in Delhi, believes that investors should not book losses at this point. He says even though you can buy cheap units at this point, you will still incur losses. “It is a very difficult decision to move to a ‘better’ scheme at this point. And that’s the important part in switching schemes. At this point, the best schemes are bleeding; we don’t know how the top-rankers will manage their downside. Unless you are investing in a scheme which has been a total failure, you shouldn’t get out,” says Gaurav Monga.





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