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Reader’s question: Should I pull out of a mutual fund scheme if it performs poorly for two consecutive years? – Khalid Munawar
Khalid Munawar asks whether two consecutive years of poor performance is enough reason to exit a mutual fund scheme.
The short answer: it depends on why the fund is underperforming and whether it's actually underperforming at all.
A fund whose returns have fallen is not necessarily a bad fund. If the broader market is down, most funds in the same category will fall too. That is not underperformance. That is the market doing what markets do.
The right question is: how is your fund doing compared to other funds in the same category? Each fund belongs to a category, large-cap, flexi-cap, mid-cap and so on. The fair comparison is always within that category, not against the broader market. Use the Value Research Fund Selector to check. If the entire category is struggling and your fund is broadly in line, there is no cause for alarm. If your fund is consistently lagging its peers, that is worth investigating.
How long should you wait before judging a mutual fund?
Two years can be misleading. All funds go through difficult phases. A mutual fund that underperforms for two years may simply be in a style or sector that is temporarily out of favour, not one that is broken.
A more reliable signal is consistent underperformance over two to three years relative to category peers, not just relative to a rising or falling market. Rolling returns, which measure performance across many overlapping periods rather than a single start and end date, are a better tool for this than a simple point-to-point return comparison.
Why is your mutual fund underperforming?
Once you are confident the fund is genuinely lagging its peers, ask why.
Has the fund manager changed? If underperformance coincided with a manager change, that is a meaningful signal. A new manager may have altered the portfolio's character in ways that no longer align with what you originally invested in. The fund's factsheet discloses manager tenure. Check when the current manager took over relative to when the performance began to slip.
Has the investment style gone out of favour? A value-oriented fund will lag in a growth-driven market. That is not a flaw; it is how style rotation works. If the fund's process remains sound and the underperformance is style-driven rather than stock-selection-driven, waiting it out may be the right call.
When to exit a mutual fund
Exit when the fund is no longer doing the job you invested in it for. The signal worth acting on is consistent underperformance relative to category peers, not just a falling market, that has lasted two to three years and cannot be explained by temporary style rotation or market conditions.
Before you exit, factor in the tax implications. Redeeming equity fund units held for 12 months or less attracts short-term capital gains tax at 20 per cent. Units held for 12 months or more are taxed at 12.5 per cent on gains above Rs 1.25 lakh.
When you are ready to look at alternatives, use Value Research Fund Compare. The goal is not to chase recent outperformers, but to find a fund whose process and track record give you confidence over the long term.
That judgment, whether your fund's underperformance is a blip or a breakdown, and what to replace it with if it is, is exactly what Value Research Fund Advisor is built for. It looks at your specific holdings and tells you what to keep, what to drop and what to move into next.
This article was originally published on April 05, 2023, and last updated on May 21, 2026.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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