Not all mutual funds are created equal, and not all mutual funds might be right for you. Sometimes, a mutual fund might not resonate with your future objectives, risk tolerance, and time frame, which may result in underperformance, hidden fees, or conflicting strategies.
Below are the five signs that your mutual fund may not be meeting your needs and steps to correct and address it:
1. Consistent poor performance
If your mutual fund has underperformed its benchmark index and peer funds for more than three years, it is a red flag. Although past performance doesn’t guarantee future returns, persistent underperformance highlights the problems with the fund’s strategy or manager.
How to fix it
Compare your fund’s performance against appropriate benchmarks and category averages using credible financial websites or mutual fund analysis tools. You can shift to a fund with a better performance record, which provides steady returns across various market cycles.
2. High expense ratio
An expense ratio above 1.5% for equity funds or 1% for debt funds can cut off your returns in the long run. The higher the expense ratio, the more fund management fees you pay, and the more it eats into your returns.
How to fix it
Search for low-cost options in the same category. Several index funds and passively managed funds provide the same exposure for lower prices. Compare mutual funds to find funds with identical strategies but lower expense ratios.
3. Misalignment with your investment goals
Your fund must align with your financial goals, risk tolerance, and timeline. If you are planning for retirement while investing in a sector-specific fund, or you are conservative but holding a high-risk equity fund, this mismatch needs to be corrected.
How to fix it
Periodically review your financial goals and risk tolerance. Talk with a financial advisor to develop an asset allocation plan matching your requirements. To diversify your portfolio and match it with your goals, you should start investing in mutual funds through a Systematic Investment Plan (SIP).
4. Lack of diversification
A well-designed mutual fund offers diversification across sectors, market capitalisations, and geographies. If your portfolio is heavily concentrated within a specific stock or sector, it puts you at significant risk.
How to fix it
Review your portfolio composition through its annual report or a mutual fund research platform. Consider switching to a diversified fund or investing more capital in other types of funds for diversification.
5. Frequent management changes
Too many changes in fund managers can result in unpredictable investment approaches and performance. If your fund has experienced several managers in quick succession, it is likely to indicate instability or challenges at the fund house.
How to fix it
Research the fund’s history and present management team. Look for funds with seasoned managers that have a proven track record and have worked with the fund for numerous years. Invest your money through reputable asset management companies that have research capabilities.
A SIP calculator for optimising investments
When modifying your investing plan or switching mutual funds, an SIP calculator might be able to aid you. It lets you figure out how different SIP strategies would perform based on your monthly investments, estimated rate of return, and investment time.
Conclusion
Long-term investment success lies in recognising when a mutual fund no longer aligns with your strategy. Your portfolio should reflect your financial goals and risk appetite, making it essential to regularly review your investments and make timely adjustments. Mutual funds are meant to support your journey towards financial well-being, not stand in its way.
