SUBSCRIBE NEWSLETTER
Financial Planning Five red flags I look out for in a fund

Five red flags I look out for in a fund

When is the right time to give exit recommendation from a fund? What are the signals you need to look out for? Find all your answers here.
Daya Ragunathan Jul 12, 2017

Advisors usually ask their clients to stick to their investments despite market volatility. However, there are times when the best advice you can give is to exit a fund. An advisor can ask his clients to quit a fund due to a combination of reasons. Some of the common reasons for an advisor to take such a call are:

Consistent decline in performance

One of the major warning signals that advisors must be cautious about a fund is its consistent decline in performance. Kartik Jhaveri of Transcend Consulting says, “If a fund is performing poorly compared to its peers, it is one of the major signs that we need to quit the fund. It is important that we compare the performance of the fund with its peers and not with the market.”

Constant churn in senior management

Another warning sign that there is some problem with a fund is a constant change in the senior management team or fund managers. Vinod Jain of Jain Investments says, “I usually avoid such funds which are seeing a lot of resignations from senior management posts. This usually means that the fund is not having a steady management. I usually ask my clients to withhold investment for a time and if the same trend continues I ask them to exit the fund.”

Rising standard deviation

Standard deviation measures the volatility of the fund's returns in relation to its average. It tells you how much the fund's return can deviate from the historical mean return of the scheme. If a fund has a 12% average rate of return and a standard deviation of 4%, its return will range from 8-16%. According to Kartik Jhaveri, increasing standard deviation usually means that the fund is having an inconsistent performance. In such cases, it is better to quit the fund, he says.

Too much redemption

Vinod Jain cautions IFAs to look out for funds, which have too much redemption. “Even if you haven’t seen the red flag there might be others who have reason to exit a fund. When a fund is having unusually huge sums of redemption, I ask my clients also to exit,” he says.

Unusually high redemptions usually mean that a fund’s performance is worrisome and investors have lost confidence in the fund.

Amalgamation that defeats the asset allocation

Kartik Jhaveri says that investors can also quit funds that have come up with a new amalgamation, if the new product defeats the asset allocation that the investor had invested for.

“Sometimes funds might incorporate a new asset allocation strategy or merge two funds; if the combination works in favour of your client, it is okay, otherwise it is better to exit such funds,” he says.

Other reasons might include:

Apart from the above reasons, fund managers should also be wary of fund houses that are not executing their mandate, says Vinod Jain. He also asks his clients to quit funds when he feels the fund manager is not acting in the investor’s interest. “I also ask my clients to redeem, if I feel the fund house has more inflows than it can manage,” he says.

Kartik Jhaveri says that he might also ask his clients to quit a few funds when he rebalances their portfolio, as they no longer serve his goals.

1 Comment
K. Kannan · 2 months ago
Hi Daya! thanks for the nice article, but it is not your own idea, you wrote he says, she says etc..etc..
please don't do like this.
Wish to stay on top of your game? Get daily tips, ideas and articles to grow your business.
Subscribe to Cafemutual Newsletter.