I wish to know how to switch money from a non-performing fund to a top-performing fund. Assume I invest through SIP in a good fund for a time horizon of 15 years. Seven or eight years later, if the performance of the fund slips, should I discontinue and shift to another top performing fund in that category? Also, what should I do about the investment made so far in that non-performing fund? Should I withdraw the money in one go and invest the withdrawn money as a lump sum in another fund?

Sachin

Yes, it is possible that a top performing fund may turn a middle-of-the-road performer over time. If you had invested in, say, 2005, in funds such as HSBC Equity or Magnum Contra or Sundaram Select Focus, for example, you may have observed that their performance has slipped in recent years.

But if you regularly review your portfolio, chances are that you will spot the underperformance sooner than later. A consistently top performing fund may not slip into steep decline suddenly. It is most often gradual and may be due to fund manager change or an ill-timed strategy change.

Any redemption pressures in a prolonged down market may also prevent a fund from bouncing back with ease when the market tide turns.

If you find a fund consistently underperforming the benchmark for three quarters or more and its peers manage at least a 5-percentage point higher return, then it may be time for you to review your holding. This will also start showing up in the one and three-year returns of the fund.

Once you spot initial signs of underperformance, stop the SIPs. But do not exit the investment made so far, if you think the underperformance is reflecting in, say, the one-year returns and not so much in the three-year returns. Wait for a few more quarters.

If the poor show continues, then first shift the investments to a short-term debt fund belonging to the fund house from which you have chosen the new scheme. Then use a systematic transfer plan to move this into the equity fund. This will ensure that the money from the sale proceeds does not lie in the savings account.

But make note of two things: one, if you have been investing with a goal, it is possible that this wait-and-watch period and the switch period may disrupt the original time frame set for your goal. Hence, you will have to rework whether the remaining period is sufficient to achieve your goal.

Two, as far as possible, shift into similar category funds, if this fund was earmarked for a specific goal. For instance, if you had expected a mid-cap fund to deliver, say, 20 per cent annually and it underperforms, you will have to go for another mid-cap fund or consider postponing your goal. Or, if you wish to go for a diversified equity fund that may be expected to deliver, say, 15 per cent, then you will have to push your investment objective a little down the line. Also, when you switch, go for established funds with a consistent track record. Consistent, rather than flashy return, is what you should look for in funds that are meant for a long-term portfolio.

*** I am a senior citizen. I was investing my limited resources in mutual funds for over six years. The funds have not been declaring dividends the way they did five years ago. I have been redeeming those invested funds.

Now I am left with the following invested funds whose market values have also nose-dived. In fact, I will not be able to get even half of the invested amount today if I redeem them. The funds are: ICICI Pru Tax Plan, Sundaram BNP Paribas Capex Opportunities, JM Basic and Principal Large Cap. I am interested in going for deposits in Sundaram Finance or Shriram Finance, where I have already made investments. The regular returns that I get from these investments are useful. Should I redeem all the above cited funds, whatever be the amount I receive from them?

Vidya Sethuraman

Yes, you should redeem all your funds right away even if it means incurring losses. If you wish to know what went wrong, it is this: one, you started rather late with equities, closer to your retirement age or at a time when you had limited resources. Equities are meant to build long-term wealth. They are certainly not dividend declaring instruments.

You would have received hefty dividends in 2006-07 because funds had a field day in the market and had plenty of surpluses to declare dividends. But they are not obligated to. The volatility in the markets, together with mediocre performance by the funds you hold, may have prevented them from declaring similar dividends now.

Two, investing in lump sums has only accentuated your pain as investments made in market peaks such as 2007 took a hard hit. Three, for those with limited resources and low risk-taking ability, investment in theme funds such as Capex Opportunities is a strict no.

You have lost over 50 per cent of your capital invested both in Sundaram Capex and JM Basic. Principal Large cap is down 20 per cent (absolute returns) from the time you bought. ICICI Pru Tax Plan, though, returned 10 per cent (invested in 2005) and 6 per cent (2006) annually for you, if you consider the dividends declared as well.

Sell all the funds and prefer Post Office Senior Citizen's Scheme, banks' fixed deposits and credit worthy corporate deposits such as HDFC and Sundaram Finance, in that order.

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