One of the most common questions investors ask is:
“My mutual fund has underperformed over the last year. Should I exit and move
to a better-performing fund?”
The natural tendency is to compare our fund with the latest top performers and
assume that switching is the best course of action.
However, investing is rarely that simple.
Just as even Jasprit Bumrah, a great cricketer went through a lean IPL 2026 and a blockbuster actor can occasionally deliver a box-office disappointment, even high-quality mutual funds can experience periods of underperformance.
The key is to determine whether the underperformance is temporary, cyclical, or indicative of a deeper problem.
Before making any decision, follow a structured framework.
1. Take a Portfolio Approach, Not an Individual Fund Approach
The biggest mistake investors make is evaluating a mutual fund in isolation.
A mutual fund is not an investment objective by itself. It is merely a tool used to achieve a larger financial goal.
The right question is not:
“Is this fund underperforming?”
The right question is:
“Is my overall portfolio still helping me achieve my financial goals?”
A fund that appears to be lagging over a short period may still be playing an important role in the portfolio by providing diversification, downside protection, or exposure to a particular investment style.
Before taking action, ask:
• Is the overall portfolio still aligned with my financial goals?
• Has the underperformance materially impacted my long-term plan?
• Was this fund selected for a specific purpose within the portfolio?
Investors often end up replacing funds simply because they are temporarily out of
favour, only to discover later that they sold them just before performance recov-
ered.
2. Understand Why the Fund Is Underperforming
Not all underperformance is bad.
Understanding the reason behind it is far more important than merely observing
that it exists.
Compare the Fund with Its Category
Is the fund underperforming only its benchmark, or is the entire category facing
challenges?
For example, if most flexi-cap funds are struggling during a particular market
phase, the issue may be market-driven rather than fund-specific.
Evaluate Whether the Fund Manager Made a Deliberate Call
Fund managers often make active decisions that may temporarily hurt performance.
Examples include:
• Maintaining a higher cash allocation
• Avoiding expensive sectors
• Favouring value stocks over growth stocks
• Taking a contrarian view when markets are euphoric
Such decisions may look wrong in the short term but could be beneficial over a full
market cycle.
Example
Imagine a captain choosing a spinning wicket and selecting three spinners instead of an extra fast bowler.
If conditions unexpectedly favour pace bowling, the team may lose the match.
That does not necessarily mean the captain made a poor decision. It simply means the tactical call did not work in that particular situation.
Similarly, a fund manager’s investment call may not work in every market phase, but that does not automatically invalidate the overall strategy.
3. Conduct a Fund-Specific Analysis
Once you understand the broader context, it is time to evaluate the fund itself.
A. Active Share – Is the Fund Truly Active?
Active Share measures how different a fund’s portfolio is from its benchmark.
A fund charging active management fees should ideally demonstrate a meaningful level of differentiation.
Example
Suppose a fund benchmark is the Nifty 50.
If the fund owns almost the same stocks in nearly identical weights as the index, investors may be paying active management fees for what is effectively an index-like portfolio.
Example
Imagine a captain claiming to have a revolutionary game plan but fielding exactly the same playing XI and using the same tactics as every other team.
Can he really take credit for superior strategy?
Similarly, if a fund mirrors its benchmark, investors should question whether active management fees are justified.
B. Attribution Analysis – What Actually Caused the Underperformance?
Attribution analysis breaks down the sources of returns and identifies what specifically contributed to outperformance or underperformance.
Instead of asking:
“The fund underperformed. What now?“
Ask:
“Why did the fund underperform?”
Example
Suppose a fund underperformed its benchmark by 3%.
The analysis may reveal:
| Source of Return | Contribution |
|---|---|
| Banking Stock Selection | +1.5% |
| Overweight IT Sector | -2.0% |
| Underweight Automobiles | -2.5% |
| Total Impact | -3.0% |
The conclusion is very different from simply looking at the return number.
The fund manager may actually have selected strong stocks but made a tactical call that did not work during that specific period.
Example
When a movie fails at the box office, there can be many reasons:
• Weak script
• Poor direction
• Strong competition from another release
• Ineffective marketing
Simply saying “the movie failed” does not explain why.
Similarly, saying “the fund underperformed” provides very little insight.
Attribution analysis helps identify the actual drivers behind performance.
C. Consistency of the Fund Management Team
The quality and stability of the fund management team are often overlooked.
Review:
• Has the fund manager changed recently?
• Has the investment philosophy changed?
• Is the portfolio construction process still consistent?
• Has the AMC undergone significant organisational changes?
Example
A team may retain the same jersey and franchise name, but replacing the captain, coach, and support staff can completely alter the team’s future performance.
The same principle applies to mutual funds.
4. Decide: Sell, Hold or Buy More
After completing the analysis, one of three actions is appropriate.
Sell
Consider exiting when:
• The original investment thesis no longer exists.
• The fund has drifted away from its mandate.
• Underperformance appears structural rather than cyclical.
• Better alternatives are available for the same portfolio role.
Hold
Consider staying invested when:
• The investment process remains intact.
• The fund manager continues to execute the stated strategy.
• The underperformance appears temporary.
• The fund continues to serve its intended purpose within the portfolio.
Buy More
In some cases, underperformance may create an opportunity.
Consider increasing allocation when:
• Conviction in the investment process remains high.
• The strategy is temporarily out of favour.
• Valuations within the portfolio have become attractive.
• The long-term investment thesis remains unchanged.
5. Get Expert Help
Most investors evaluate mutual funds using only one metric: recent returns.
Unfortunately, this often leads to buying yesterday’s winners and selling yesterday’s losers.
Professional fund evaluation requires much deeper analysis, including:
• Active Share analysis
• Attribution analysis
• Portfolio construction review
• Risk assessment
• Fund manager evaluation
• Portfolio role and objective assessment
At Ascent Financial Solutions, we do not recommend a fund solely because it has
delivered superior recent returns.
Our research process involves analysing both quantitative and qualitative factors
before arriving at a recommendation.
Some of the Qualitative Factors We Evaluate Include:
• Stability and experience of the fund management team
• Consistency of investment philosophy over time
• Clarity of the fund house’s investment process
• Risk management framework followed by the AMC
• Portfolio turnover behaviour
• Alignment between what the fund manager says and what the portfolio actually
reflects
• Organisational stability and governance standards of the fund house
In addition, we closely study Active Share and Attribution Analysis to understand whether performance is being generated through genuine skill, temporary market conditions, or simply benchmark replication.
Conclusion
The objective of investing is not to own the best-performing mutual fund every year.
The objective is to build a portfolio that consistently helps you achieve your financial goals.
A fund should never be judged solely on recent returns.
It should be judged based on whether it continues to fulfil the role for which it was originally selected.
Successful investors do not chase performance. They build goal-aligned portfolios, remain disciplined, and make decisions based on process rather than emotion.
Because in the long run, wealth is not created by owning the hottest fund of the year.
It is created by owning the right portfolio for your goals.
Sources – SBI Securities, National Savings Institute
