You chose the best mutual fund after a rigorous research. Now, you can rest easy for at least five years, right? Wrong! The so-called ‘best’ mutual funds do not remain so forever.
Funds, especially equity mutual funds, change. Unlike other investments, there are several things that could go wrong with a fund. Their performance could drop or their fund managers can leave. The fund’s strategy itself could change.
So, it is important that you be on the lookout for news on your fund or monitor your fund regularly to ensure that everything is in place. Even though you don’t need to look at them on a daily basis, a quarterly review can help save you from huge losses.
But how do you find out whether there is something wrong with a particular fund? There are certain ‘signs’ that you could watch out for. Here are some of them. Note that this doesn’t mean you need to sell the fund. These signs will help you figure out if you can continue to hold the fund in the long run.
Is it getting bigger?
It’s not at all surprising that everyone wants to invest in the best mutual funds. This means that almost every other person is investing in this best fund that you have chosen. What happens then? The Assets Under Management (AUM) of this fund swells. The bigger the fund, the slower it becomes. Why? This is because fund managers have to deal with huge amounts of money.
Trading in huge amounts of money isn’t easy. The strategies need to be very sound to ensure that all that money is put to good use. The fund manager should be able to deploy all the money in the right places for great returns. This isn’t easy either. This is why big funds often slow down and their returns come down to average from great.
This is one of the reasons why some open-ended mutual funds turn into close-ended funds where fresh investments will not be possible. So, you need to keep an eye on your funds just to ensure that they don’t fall into this category. Check if the performance of a fund is slowing down over a period of time due to its size. If it is, you can look out for other funds that have performed better and have a reasonable fund size.
Have its objectives changed?
You chose that particular fund because it invests in a particular fashion. For example, it could be a large-cap fund. You chose it because the risks will be lower when compared to a mid-cap fund. Do you know that the fund’s objectives can change at any point in time? Yes. That’s possible!
The asset allocation or the way the fund invests can be changed by the fund house. The worst part here is that the consent of the investor is not needed for doing this. Frustrating? We understand. Any changes in the investment objectives of the fund have to be only approved by the trustees of the scheme. The investors will be informed about the changes later. It is, of course, communicated to every investor individually.
However, a change in the fund’ objectives would mean a change in its risk quotient and subsequent returns. This is why you need to be on the look-out for updates from your fund house. If you think the fund’s objectives are no longer in line with your risk appetite and goals, you might want to look at other funds. However, the good news is that when the fund’s objectives change, fund houses give investors an option to exit the fund without paying any charges.
Is the fund getting a new manager?
He/she is the one who calls the shots. Yes, we are talking about the mutual fund’s manager. Returns from a fund are directly proportional to how good its manager is. The more efficient the manager, the better the returns. So, if your fund has been giving great returns and its manager is going to change, you need to see if everything is going to be alright with the fund.
First, you need to understand how good this new manager is going to be. Check their past track record. The funds they have managed. If they seem like a decent bet, stick to the fund. The second thing is the taxation bit. If you are going to have to pay taxes when you exit the fund, don’t do it because the manager has changed. Wait to see how the fund performs. This will give you time to sell that fund without tax implications.
Another thing you need to keep in mind is what kind of a fund is this. If it is an index fund that just mimics an index, fund manager changes will not affect the fund’s performance. Fund managers make a huge impact only in case of actively managed funds.
Think your fund house has the best managers? Then, there is nothing to worry about.
Is your fund house being taken over?
There are small fund houses and then there are the huge ones. The latter is always looking to take on one of the former. This helps the big fund house grow even bigger without having to keep launching new funds. This is good news for the fund house but may not always be good news for investors. If the fund house you have invested in is being taken over, you need to be concerned.
If your fund house is being taken over, then, its policies might change. For example, if a conservative fund house is taking over an aggressive one, it might want to change the objectives of funds that have been investing largely in small-cap stocks. If you invested in the fund because it was aggressive, you might have to watch out if its returns change once it becomes more conservative.
Another issue is that your fund manager might be asked to manage three or four funds instead of one. This could mean lower returns if the fund manager is not diligent. Also, new roles and responsibilities in the merged fund house could have an impact on the fund’s performance.
So, watch out for your fund’s performance if there are talks on mergers and acquisitions. You could take a call after checking the performance of the fund for a few months.
How to get those updates?
There are many ways that you can keep yourself updated with information about the mutual funds that you have invested in.
One is by visiting the fund house’s website. This will have all the information that you need about the fund. You can also visit the Securities and Exchange Board of India (SEBI) website to stay updated about a particular fund house. Fund houses have to register all their new fund offers with SEBI. You, of course, can browse those financial websites to gather information about your fund or fund house. And don’t miss those updates from your fund house on the performance of your fund.
So, the next time you get that mail from your fund house, don’t just hit the delete button without looking it up. It could change your mutual fund’s performance for all you know.