When advisors choose a fund, they consider various factors. Similarly, there are certain funds they avoid.
While advisors might not suggest a fund if it does not suit a client, they also have reservations about funds that consistently underperform or have too much instability in their top management. Read on to find out what advisors consider as the top reasons to avoid a fund.
Not remaining true to mandate
One of the top reasons not to choose a fund is an unclear mandate or a fund that does not remain true to its mandate. Suresh Sadagopan of Ladder7 Financial Advisors feels that advisors should avoid funds having vague mandates. “I prefer funds with clearly defined mandates. Fund managers should remain true to the mandate. It helps advisors because when I choose a fund for my clients I am thinking about their asset allocation. A fund that keeps changing its asset allocation throws us off. Then we have to rethink our client’s portfolio. I also avoid funds that have a very ambiguous mandate,” he says.
Performance during market cycles
Advisors avoid funds with inconsistent performance. “It is not about how they perform when the market is in rally or if their performance was good in the previous year. I only suggest funds that give consistent performance. Even if they do not outperform during market rally, as long as they give steady returns during down market cycles, I am happy. In my experience, I find that historic performance is also equally important to gauge the performance of the funds across market cycles,” says Jayant Vidwans of Vidwans Financials.
Changing fund managers
Another major turn off for advisors is a constant churn of fund managers. “Despite what fund houses claim, we are not comfortable suggesting funds that see a constant churn. I am more inclined to suggest funds which have a stable fund manager with a good track record,” says Vinod Jain of Jain Financial Advisors.
“If there is constant churn in the top management of a firm, I decide to go with a different fund,” he says.
Other reasons for not choosing a fund include not so good track-record of the fund manager or fund ranking. While track-record of fund managers help understand the portfolio construction better, constant change in fund rankings indicate inconsistence performance of the fund.