Key points to keep in mind when choosing an active equity mutual fund

Buying and exiting active equity funds based solely on recent performance usually leads to a sub-par investment experience and bad returns in the long run.

Arun Kumar, Head of Research, Fundsindia, explains, “Active Equity Mutual Funds have a portfolio that differs from the index (the amount of difference will depend on the fund’s strategy). As a result, for better or worse, performance will be different from the index. “

All investment strategies (even if they have a long successful track record) will inevitably go through a period of low performance against the benchmark. “Sometimes the proliferation of poor performance can be extremely long,” Kumar says.

He added, “The key is to differentiate between a good fund that is going through low efficiency and a weak fund going through low efficiency.”

How should you choose?

Whenever a fund performs below the benchmark in 3Y, 5Y and 7Y terms, here are some things you should check out;

  1. Consistency, Kumar says, lies in the underlying investment strategy and process. What is the strategy of the fund?
  2. Do other funds follow the same investment pattern and show lower performance trends?
  3. Does the fund have a long track record of outperformance (10+ years)?
  4. Has the fund been a consistent performer in the past – what percentage of times has it surpassed the benchmark in the last 10-15 years in terms of 5Y and 3Y rolling returns?
  5. Does it fall below the benchmark when the market falls? (A fairly proxy for understanding the risks of funds)
  6. Is there any change in the fund manager?
  7. Has the fund become too large and is facing size constraints?
  8. Does the fund communicate clearly and transparently because of its poor performance?

How long should an investor wait before moving away from an underperforming scheme?

Typically, in the case of a good fund (satisfying all of the above conditions) going through a temporary low performance, according to Kumar, you can give it a 3-5 year runway to test performance improvement. If the fund continues to perform poorly or if you find an alternative fund following the same investment style, with good performance continuity, you can opt out of the fund.

“Ideally covering an entire market cycle (usually about 5-8 years) – a good timeline for evaluating the long-term performance of a fund consisting of a bull phase, beer phase and a recovery phase,” Kumar added.

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