14/12/2019 When to sell a poorly performing fund : Value Research

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Learning      09-Oct-2019

When to sell a poorly performing

fund
Fund Ratings tell you how a fund has performed on a risk-adjusted basis
relative to its category in the past
By Research Desk

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14/12/2019 When to sell a poorly performing fund : Value Research

One of the main purposes of monitoring your investment portfolio is

to identify the bad guys and throw them out. ere is also the
attendant question of getting the good guys in, but that comes later.
When equity markets are doing badly for an extended period of time,
it is easy to find fault with how most funds are doing. But identifying
funds that are the real dogs is a little more complex than that.

In bad times, fund managers are really tested because that is also the
time when it is easiest to misidentify reasonable performance as
something bad. Instead, we need to consider in what sense a fund has
performed poorly. ere are three or four types of poor performance
that we should distinguish between. First, there is absolute returns.
Clearly, an equity fund that has had returns of say, 5 per cent per
annum over the past five years, hasn't even kept up with a bank
deposit. So an easy conclusion would be that such a fund has done
badly. However, that may or may not be true.

While a fund may be disappointing in terms of absolute returns, there

are other questions that are more important. For instance, how has the
fund done compared to its peers? Is it higher or lower than the average
of its category?

Now this is something you can easily find out if you tracked your
portfolio on the Value Research website. Here you can also check how
the fund has performed in comparison to its benchmark index.

Apart from this, there are a variety of statistical measures that can tell
you how the funds in your portfolio are doing. However, this can very
quickly become too complex if you are not used to doing this kind of
research. Instead, use a single measure that encompasses these
attributes to find out whether your fund's performance is adequate.

e Star Rating of a fund that Value Research updates every month

provides such a measure of performance. e Fund Ratings tell you
how a fund has performed on a risk-adjusted basis relative to a
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14/12/2019 p When to sell a poorly performingj fund : Value Research
relevant category in the past. is way it balances both risk and return.
e fund rating is a good starting point for fund evaluation.
As a general rule of thumb, you should be invested only in five-star
and four-star funds. If a fund's rating drops one step, treat that as a
warning; and if it drops two points, then you must pull out of it and
shift the money into a five-star fund of the same type. Of course for
tax reasons, you shouldn't sell out of investments that have been held
for less than one year. But don't worry - funds rarely see such a rapid
change in their ratings.

e bottom line is that when you monitor your portfolio for funds that
aren't doing well, then instead of the bare returns, a composite measure
like the Value Research Star Rating gives you the real picture.

is article first appeared in October 2013.

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