Is it Time to Dump Your Fund?

It isn't past performance alone that will help you decide when to part with your fund. There are a number of other factors at play.

Tanvi Varma/Money Today        Print Edition: April 2011

Your advisor might have told you which mutual fund schemes to buy and how much you should earmark out of your overall investment portfolio for each of the schemes. But did he come back calling at any time to tell you which of the schemes are not performing well, or about the ones where the future does not look bright?

Most often, intermediaries don't bother to revert with the tip on when to prune your holding in a fund scheme or exit it fully. Maybe your advisor is avoiding you because he himself convinced you to buy the scheme, which doesn't look like a great investment now. So, an investor is left with the fait accompli of having to take the 'sell' call, whenever required, on his own. And in a dynamic and volatile environment it may not be an easy call to take.

The triggers could be of a wide range. According to market experts, investors can look at whether the fund has been a consistent laggard, the developments within the fund house, the change in the character of the fund and its composition. A decision to exit the fund can also be taken based on the altered life-goals of a person. So, what are the things to watch out for that could ring those alarm bells that tell you it's the right time to exit a fund?

NOT ALWAYS THE PAST

Wealth management experts say the decision to enter or exit a mutual fund can hardly be based just on a fund's performance in the recent past. "It involves greater science than just looking at the fund's returns," says Vishal Kapoor, general manager, wealth management India, Standard Chartered Bank.

Past performance, more often than not, is not sustainable. For instance, infrastructure funds, at the helm during the bull run of 2007, fell flat after the financial crisis that began in late 2008 with many languishing in the bottom quartile today. UTI Infrastructure Fund, for instance has returned a negative 10% return in the last one year, compared to 72% gains it delivered in 2007. As an investor, it is important to know that different sectors outperform at different times. FMCG and pharmaceuticals, for instance, are known to be defensives and do well during recessionary phases. On the other hand, sectors such as capital goods and commodities do well during bull runs.

"Although returns are the easiest way to gauge the performance of a fund, it shouldn't be considered in isolation, says Fahima Shaikh, assistant manager, products, IIFL. So, how do you decide whether your mutual fund portfolio needs refurbishing? The fund's consistency in returns, the fund's strategy and how it co-relates with your investment objective is what you should study," says Kapoor.

IN A RACE TO THE BOTTOM?

According to Kapoor, if your fund has consistently been among the bottom 25%, in terms of performance, in its category, for a year, it may be worthwhile to exit the fund. Analysts say, a fund's performance should always be compared to a benchmark such as the Sensex and to other funds in its category. This kind of comparative analysis gives a clear picture about the standing of the fund within its universe. For instance, when compared to the returns given by the Indian markets in the last one year, equity funds focused on international markets outperformed by a large margin. They delivered a return of 20% compared to 8% by the Sensex.

The performance of Birla Sun Life's Commodities Precious Metal Fund when compared to its benchmark, the Dow Jones Precious Metals Index shows that for the period, January 2010 to January 2011, it has given a return of 25%, lower than the index which returned 36%. Although the fund has done better than Indian equities, the investor could look at better performing funds in the precious metals category.

"If your fund has been among the bottom 25% in its category, for a year, it may be time to exit."
Vishal Kapoor
GM, Wealth Management India, Standard Chartered Bank
On the other hand, in the last one year (March 2010-February 2011) we have seen some of the worst performing funds from the JM Mutual Fund stable. JM Basic Fund -which will soon have two more funds from the same group merged into it-has delivered a negative return of 26% compared to 9% delivered by the BSE-200. The fund mainly invests in basic industries like power, industrial goods, metals etc, with the BSE-200 as its benchmark and falls in the same league as multi-sector funds such as Birla Sun Life Basic Industries Fund. The fund's consistency has somewhat been in doubt through various periods. During the bull runs of 2007 and 2009, the fund has been among the best performers but during the recent downturns it was one of the biggest losers.

HSBC Progressive Themes fund, too, is a laggard among its peers as far as returns of the last six months to two years are concerned. It gave a negative return of 13.22% in the last one year. Its peers include large and mid-cap funds such as DSP Opportunities Fund, which, according to Valueresearchonline, gave a return of 12% in the last one year.

RISK Vs RETURN

Analysts often use the Sharpe ratio which helps you gauge how much of the extraordinary returns generated by a fund are a result of extra risk taken by the fund manager. A higher ratio indicates that the investor is earning a good return despite low risk. Joseph Thomas, head, investment advisory and financial planning, Aditya Birla Money, however, prefers to measure a fund's consistency by looking at rolling returns, among other parameters.

For those not familiar with the term, 5-year rolling returns of a fund for a particular year are the average annualised returns of the last 5 years ending with the year for which returns are being calculated. Thomas also recommends schemes with a beta level of less than 1, the beta level representing the risk of a portfolio in comparison to the stock market risk.

SCRUTINISING THE PORTFOLIO

"Another factor, often ignored is the portfolio of a fund or its strategy which is vital for assessing a fund's health," says Shaikh. According to her, investors must know how a fund has been constructed and what kind of stocks and sectors the fund is exposed to.

"If the investor is uncomfortable with the portfolio and feels it has deviated from the mandate, then he can decide to switch to other funds," she adds. Sometimes, funds change names or investment mandate to attract more customers or to get rid of a tag that didn't appeal to investors. For instance, JM Auto Sector Fund was re-christened as JM Mid Cap Fund and JM Healthcare Sector Fund became JM Large Cap in May 2009.

-26% is the return given by the worst-performing fund in the last one year.
Also, during the technology boom of 1999, almost every fund house launched a technology fund or its variant, but when the bubble finally burst, funds had to either rename their schemes or alter the fund philosophy. In 2002, Tata IT Sector Fund, for instance, morphed itself into Tata Select Equity Fund which has a much broader mandate. Though the change has been good for the fund, it could be in sectors that are quite unrelated to what you had in mind. So, do be aware of such changes in a fund's portfolio and keep your investment in such funds on your watch-list.

KNOW THE INSIDE STORY

Typically, fund houses go through many changes in their lifetime. A change at the helm or a new fund manager may end up being detrimental to the health of your fund. This happens in organisations where the fund manager drives the investment decisions and thus, the returns. Other factors include a change in ownership of the asset management company, exit by existing shareholders or any other news or information which could cast doubts on the sustainability of the business venture, says Thomas.

LAST BUT NOT THE…

If there has been a change in your life goal, you need to re-evaluate your portfolio. This could happen when you have already achieved your goal of buying a house or your child's education. "It may be time to modify your portfolio, say, move to debt as you get closer to retirement," says Gaurav Mashruwala, certified financial planner.

And then there are times when the changing market trends can present alternative investment strategies that could work better for you. Adarsh Shamdasani, a long-term investor in the market, recalls the above-average returns that arbitrage funds posted 3 years ago. "One-year returns were in the range of 8-9% around 2007, with the added benefit of their being tax-free investments," she says. However, it didn't last too long. The reduced arbitrage opportunities in the market and increase in the number of funds chasing limited opportunities has led to a fall in average returns to 6.5%. Today, you are better off investing in a fixed deposit or a Fixed Maturity Plan (FMP), which offers better tax-adjusted returns. An FMP, for instance, is now yielding 9.5-10% for a one-year deposit, almost tax-free after adjusting the tax liability to inflation.

The size of a fund, too, can become a deterrent sometimes. Reliance Growth, for instance, became too big for the fund manager to handle and at one point it stopped accepting any fresh investments.

"When the fund is of a reasonable size, say, worth Rs 1000-2000 crore, given the liquidity and depth of the Indian markets, it is more easily manageable but too big a size brings in difficulties with respect to meaningful modifications," adds Thomas. So, a constant review of the fund's size is a good idea, he says.

However, it may not pay to be over-cautious. Although constant portfolio review is absolutely necessary, one shouldn't get bogged down by daily tracking of one's investments, whether it is mutual funds or any other asset, says Kapoor of Standard Chartered Bank.

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