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One of the key warning flags that investors should be aware of a fund is a consistent decline in performance. (Photo Credit: freepik)

Sarabjit Bhatia was shocked to see his mutual fund portfolio had been performing below average.
He approached his financial advisor and asked him for the explanation of what is going on with his mutual fund portfolio and whether he should exit certain schemes.

Most financial advisors tell their clients to stay invested, no matter how volatile the market is. While quitting a fund might be beneficial in certain cases, it isn’t always the wisest option. That said, financial advisor may suggest that a customer withdraws from a fund for a variety of reasons.

So, when to know it is time to exit your scheme? Let’s take a look:

Even if you have reached your financial target, some occurrences should be considered red flags in your portfolio that might be dragging your returns down.

That said, these actions necessitate a review of the fund. While low performance for more than a year might be due to a market volatility, but it is better to research and obtain expert advice on the subject.

Constant change of the fund managers
As an investor, you should avoid funds with that have high rate of senior management resignations since these signals inefficient management.
Due to the fact that, unlike certain funds in more developed countries, the fund manager in India is not truly a brand name. People often invest in a certain fund because it has performed well in the past. Alternatively, if they are beginners, they are more inclined to invest since the fund business has a well-known fund manager.
Investors should keep an eye on the news related to the changing fund managers as with the change in the fund manager there comes a new fund manager and his style of investment also changes. This can also impact your returns.

Standard deviation is high
The volatility of a mutual fund is measured by its standard deviation. It also shows how much your fund’s return deviate from the scheme’s historical mean return.

A larger standard deviation indicates more volatility, but a smaller standard deviation indicates a less volatility, which is good for investors. A rising standard deviation usually indicates that a fund’s performance is uneven. In such cases, it is best to exit from the fund.

Consistently lower performance
One of the key warning flags that investors should be aware of a fund is a consistent decline in performance.
If a fund underperforms its peers, then it is one of the main indicators that they should exit the fund. As a result, rather than comparing the fund’s performance to the market, it’s crucial to compare it to its peers.

Finally, if a few funds are no longer serving their aim, it is always advisable to leave them while adjusting their portfolios, either with the aid of a financial planner or an advisor.
“Underperforming for a long period of time compared to the benchmark index. Further you can also exit a scheme if your goals have been achieved or even a shortfall of 5-6% is fine, which can be covered from liquid funds or debt funds,” said Manoj Dalmia, founder and director, Proficient equities Private limited.

Money9 suggests
-An investment should not be exited and redeemed just because of a short-term loss. Mutual fund performance should not be judged only on the basis of uneven profits.
-Consider your financial objectives while making investments in mutual funds, so you know if you need to exit your mutual funds how this will impact your goals.
-Capital gains taxes are something to bear in mind. Make a plan for what you’ll do with your money once you withdraw it from the mutual fund.

(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)