Give your funds up to three years and then weed out the laggards

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Mumbai: Management consulting aspirants at top B-schools are often warned about the industry’s ‘Up or Out’ policy, one that rewards excellence and is rather severe on relative mediocrity. Experts now want savers to adopt the ‘Up or Out’ policy while choosing mutual funds.

So, they are urging savers to cut the rope on relative stragglers at a time pooled fund flows to the equity markets have helped offset the impact of unidirectional exits by foreign funds. Doing so will require domestic savers to review and churn portfolios much more frequently as they seek to weed out relative underperformance.

“Portfolios should be monitored once a quarter. The aim should be to own a fund which is in the top quartile in its category,” said Jignesh Shah, founder, Capital Advisors.

Canara Robeco Small Cap Fund, for instance, is the best performer in the category delivering 14.7 % returns over the last year, while ITI Small Cap Fund at the bottom lost 18.36%. Relative to the top performer, an investor in the latter fund lost 33%.

In the large-cap category, the gap is lower at 13% with Nippon India Large Cap Fund gaining 8.05%, while PGIM India Large Cap at the bottom lost 4.63%.

Differences continue to be high even for investors staggering their investments using systematic investment plans (SIPs) over three years. A three-year SIP in Quant Flexicap gives 34.15% annualised returns while in

Flexicap the yield is 5.95%.

Financial planners believe funds should beat their benchmarks and weed out those not performing even after 2-3 years.

Many investors are tempted to go by past performance and exit the bottom performers, but financial planners said this may not always work. It is possible that a bottom performer could have taken bets that have not worked, but could work going ahead.

“Look at the track record of other schemes managed by the fund house. If they are doing well and one particular scheme has underperformed, one should wait as a couple of stock calls would not have worked,” said Harshvardhan Roongta, CFP, Roongta Securities.

Roongta believes while there is no single way to avoid an underperforming fund, many times strategies adopted by a fund manager could take time to play out. He believes investors should give two years to a fund manager and if there is underperformance still, other options can be looked at.

“If the fund performance deteriorates due to a change in fund management, or change in style, it may make sense to pause the SIP in the scheme and hold the accumulated money there for some time to negate the impact of exit load and tax,” said Anup Bhaiya, CEO of Money Honey Financial Services.

Financial planners also believe the sharp difference in scheme performance is happening due to a fast-changing global environment. In addition to this, central banks are acting fast, there are geopolitical tensions and the impact of Covid 19 – factors that have combined to lead to sharp volatility in the markets.

Fortunes of several industries change quickly, thereby leading to divergence of returns. While sectors like IT gained the most due to demand for new technologies post Covid-19, shortages of semiconductors led to poor performance from auto stocks. Chemical stocks gained due to the ‘China plus 1’ strategy adopted by many countries, while commodity price increases lowered demand for consumer goods, which hurt those stocks.

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