Exiting a fund has to be done without emotions but with clear reasoning
09-Feb-2011 •Research Desk
I regularly follow your suggestions and the one on reviewing one’s investments intrigues me the most. What should one do with the investment if that particular fund is not doing well and the money is not required at this stage? Should we start STP in that scenario? Kindly suggest some options?
— Harpreet Sing
Invest and forget is an approach that one cannot live with, especially when investing in mutual funds. The need to review one’s investment depends on internal and external factors. Internally; your financial goal or need may change or your risk appetite will change. Likewise, performance of a fund may go down, which can be relative to its peers or in absolute terms. There is also the possibility of a fund no more following its mandate. There is a possibility of a large- and mid-cap fund turning into large-cap or a small- and mid-cap fund turning into a mid-cap fund. These changes also impact the performance of funds that one should be aware of.
Exiting a fund has to be done without emotions but with clear reasoning. Our star rating system is based on a risk-adjusted mechanism which can be used as the first filter to invest as well as when to exit a fund. If a fund is repeatedly performing badly, compared to its peers and benchmark; it will start to lose stars in the ratings. This is a good sign to consider exiting the fund. However, just because a fund has gone from 5-star to 4-star it is not a serious cause of worry, but if it continues to lose stars, it is time you exited the fund. Your best option is to exit. Starting an STP is just holding on to the bad fund hoping for it to turnaround.