'If a fund can’t beat its benchmark, I will sell it': Dhirendra Kumar on when to switch, sell mutual funds

After two blockbuster years of high double-digit gains, 2025 has turned out to be a sobering year for mutual fund investors, with most equity schemes struggling to keep pace with the broader market. Data from Ace Mutual Fund shows that nearly 80% of equity mutual funds failed to beat their respective benchmarks during the year, highlighting the challenges of active fund management in a more volatile and uneven market environment.

Benchmark indices delivered modest returns. The BSE Sensex, which tracks 30 of India’s largest companies, rose 8.67% year-to-date, while the Nifty 50 gained 9.87%. The broader Nifty 500 index, which captures wider market participation, was up just 6.04%. Compared with the sharp rallies of 2023 and 2024, these numbers disappointed investors who had grown accustomed to outsized gains.

Market experts warn that holding an underperforming fund for too long can significantly hurt long-term wealth creation. Investors may need to reassess their portfolios and consider pruning laggards, especially if life goals are approaching, target returns have already been achieved, or a fund has consistently underperformed its benchmark and peers.

Dhirendra Kumar, founder and CEO of Value Research, explained that disappointment is a natural reaction for many new investors. “I invest to earn returns, and soon after I invest, if it goes down in value, it falls—that’s unsettling,” he said. “Most new investors are used to fixed deposits, which only go up and never come down. Even though people hear disclaimers about volatility, the first fall in value often comes as a shock.”

According to Kumar, underperformance becomes a warning sign when it is persistent rather than cyclical. “If a fund is unable to beat its benchmark, I will sell. If it consistently sits at the bottom of its category over a two-year period, quarter after quarter, I will sell,” he said. He also flags fund manager exits as a red flag, noting that a change in leadership can bring a completely new investment framework and strategy.

However, Kumar cautioned against impulsive decisions. “I will not sell a fund soon after investing. If I have chosen a fund carefully—because it beats its benchmark and is a consistent performer—I will give it time,” he said.

One of the biggest fears investors face while switching funds is breaking the power of compounding. Kumar dismisses this concern if the money is reinvested. “Switching breaks compounding only if you take the money out and consume it. If you reinvest it, compounding continues. What really breaks compounding is staying invested in a poor performer,” he said.

That said, taxes remain an important consideration. Selling a fund that has generated gains can trigger capital gains tax, reducing investible capital. “That’s why switching should not be hurried. But if a fund is not worth holding, pay the capital gains tax and move on,” Kumar said.

The actual process of switching, he added, is simple. “Redeem the fund and invest the proceeds into the fund of your choice. Don’t stagger it. You used SIPs to accumulate money, but when you switch, you can redeploy it in one go.”

Kumar also highlighted a common behavioural mistake: chasing past performance. “Every market segment is cyclical. Investing just because something has done exceptionally well often leads to disappointment,” he said. Instead, investors should focus on patience and discipline, giving funds at least two years to prove themselves before making a switch.

“Switching is not about timing the market,” Kumar concluded. “It’s about understanding whether a fund has truly lost its edge and acting with clarity, not emotion.”