When should I exit my poorly performing mutual fund?

Summary: Struggling with a mutual fund that's tanking after two rough years? Don't rush to exit. First, check if it's truly underperforming its peers or just riding a market dip. This guide unpacks key factors like manager changes and style shifts to help you make informed decisions.

Should I pull off a mutual fund scheme if it performs poorly for two consecutive years? – Khalid Munawar

Before making the decision to exit a mutual fund scheme, it is essential to ensure that your fund has actually become an underperformer. Underperformance is when the fund gives lower returns than other funds of the same type, as explained here.​

Here is what you should do: check its performance compared to other funds of the same category using tools like Value Research Fund Selector. How well are the other funds in the same category doing? Have they also fallen? Or is it just your fund that has been falling? Do not mistake a falling fund with an underperformer. Returns from a fund may simply fall due to a fall in the stock market.​​

Is the underperformance consistent? All funds go through a rough patch, and moving from one fund to another at the drop of a hat is not wise. The underperformance should be consistent for at least two to three years.​

Now, once you are sure that your fund is underperforming, you can try and find the reason behind it. Check whether there has been a change in fund manager and whether the underperformance coincided with the change. If so, then it's probably time to exit. 

Suggested read: Your mutual fund is underperforming. When should you sell?

If the style of investing itself has temporarily gone out of favour, penalising the fund alone may not be right. For example, the growth style of investing has lately underperformed the value style of investing. In such a scenario, if the fund's foundations remain strong, there shouldn't be any harm in sticking with it for a bit longer.​

While everyone wants their chosen fund to always provide spectacular returns, this is not always possible. All funds go through both good and bad phases. If the fund in which you invested fails to fulfil your objective of earning reasonable returns, it may be time to get out. There is no point in sticking with a laggard. Compare options using Fund Compare.​

Before making any decision, it is important to note the above points. If you find compelling reasons, you may choose to exit the mutual fund scheme, guided by best practices on exits.

Suggested read: What to do with a non-performing fund?

This article was originally published on April 05, 2023, and last updated on February 20, 2026.