Some of yesterday’s 5-star rated funds like Reliance Growth, Reliance Regular Savings Equity, Sundaram Select Midcap, HDFC Equity have seen a drastic drop in their performance in the past 1.5 years. Has the fund manager stopped taking interest in these funds, or is the research not working for them? What is the reason for the drop in performance of these funds? They leave investors with the only option of shuffling their schemes.
-Raj Dahiya
A lot of investors ask us questions similar to yours. You invest in a fund when it was 5-star rated, but it slips on the ratings at a later date. The rating is not a permanent thing; basically it is a relative grade that it was among the top performing funds of the universe. The rating system has been devised in such a way that it does not change radically. The fund’s long-term history is also taken into account. The ratings should be used as a good starting point, but not as a conclusive parameter.
Coming to the funds that you’ve mentioned, the performance slip of some of them has not been sudden. Their underperformance has been gradual. Investors must remember that a mutual fund can turn mediocre; there is no guarantee of it replicating its good performance. Any market-related instrument will keep changing in value, for a variety of reasons. One of them is the market itself. A lot of bad funds do well in a bull market, and vice versa. Some of the funds mentioned by you have done poorly over a long period of time. Over the past 3-4 years, they haven’t hit upon any brilliant idea that can help them improve their performance.
Hence, investors should keep a watch on the funds they have invested in. The rating should be used as the first filter and keep in mind that the performance of any market-related instrument is bound to undergo a change. A slip from a 5-star rating to a 4-star rating should be used as a pointer to keep a watch on the fund’s performance.
This article was originally published on March 14, 2012.
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