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Signs of Underperformance

A fund’s faring poorly is indicated in its falling ratings. You should exit when such signs of underperformance are evident…

I am a regular SIP investor and have invested Rs 1,000 in Reliance Growth fund since 2007 when it had a 5-star rating, which is now 3-star. Should I continue to invest in this scheme? If I shift to some other fund and after three years that also stops performing, what will be the use of shifting?
- Pradeep Gangoli

The Value Research star rating is a good starting point to select relatively better funds within a fund category. The star rating is based on risk-adjusted rating system and acts as the first filter in fund selection wherein a higher rating indicates good performance and a steadily deteriorating rating indicates a fund’s performance losing streak. The star rating is reviewed each month and is based on the actual continuous performance of the fund, which means a performing fund is acknowledged as much as a non-performer. Moreover, a rating does not have a steep fall from 5-star to 2-star; it is gradual indicating that the fund is consistently losing out. It is for this reason that we insist that mutual fund investing is not a one-time exercise and investors should review the performance of their investments at least once a year and asses the progress made by their investments. Reliance Growth has been faring badly for some time and it is reflected in its returns as well as star rating, the indication should have been noted and the fund exited in when signs of underperformance are evident. The lesson for you from this investment is to track the performance of your investments and exit funds that start consistently losing performance.

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