Smart investing: Underperforming assets? Here’s what you can do

By: |
December 9, 2020 6:15 AM

Compare the investment’s underperformance with a similar category of instruments that carry a similar level of risk. Do a thorough research so as to make informed course-corrective decisions

Equity mutual funds are more volatile than debt funds. You may witness some of your equity funds underperforming compared to other similar funds in the market.Equity mutual funds are more volatile than debt funds. You may witness some of your equity funds underperforming compared to other similar funds in the market.

It may not always be easy to eliminate risks from investments. Sometimes the market does not behave as expected and some investments may underperform and fail to deliver the expected returns. In such a scenario, you may fall short of your financial goals. It may also happen that the investment product you’ve chosen will deliver a lower return than other similar products in the market. So, underperformance is a relative term. The question here is: what should you do when your investments underperform? Let’s explore the answers in context to different types of investment products.

Fixed deposits
Irrespective of whether you have invested in bank FDs or are planning to do so, the lowering of applicable interest rates in recent months, especially when compared with other instruments in the market, is likely to be a cause of concern. However, be very cautious about understanding the inherent risks of another instrument that could provide higher returns than FDs before making a switch, especially during these uncertain times when capital protection has become as important as capital appreciation.

If your risk appetite is low, you may want to continue with your FDs or consider breaking your corpus into different FDs held with different banks and create an investment loop for higher total returns or move a portion to other instruments that could offer higher returns without unduly increasing the risk factor. These could be small savings schemes, liquid funds, suitable debt funds, AAA-rated corporate FDs, etc.

If your risk appetite is high, you should look at moving a portion of your corpus into riskier instruments such as equity fund SIP that could generate higher returns. Also, consider factors like liquidity requirements and the balance of your portfolio while selecting your combination of investments.

Equity funds
Equity mutual funds are more volatile than debt funds. You may witness some of your equity funds underperforming compared to other similar funds in the market.

Sometimes, a particular equity fund may underperform because some of the stocks in its portfolio don’t perform well immediately. If the underperformance persists and you notice reasons like change in the fund manager, poor stock selection by the fund manager, etc., you may switch to other equity funds that you expect to do better. You may also take the help of a certified investment advisor for selecting the right equity fund.

Debt funds
Debt funds usually offer greater stability and carry lower risk than equity funds. However, if the debt fund you’re invested in underperforms in comparison to other similar funds in the market, you should carefully analyse the fund’s portfolio. You need to match the fund’s portfolio with its investment objective and try to find out whether the underperformance is temporary or it may deteriorate further. If your fund is not performing well due to a higher expense ratio, change in investment strategy, or problematic approach by the management and things don’t seem to improve soon, you can consider selling the fund or switch your investment to another appropriate debt fund. You should wait to get clarity about whether the debt fund’s underperformance is cyclical or due to a temporary economic impact.

Direct investment in equities
Direct investment in the stock market is usually highly volatile and it requires lots of patience and the right approach to earn good returns on a consistent basis. If your stock investments are underperforming or generating negative returns, you must first analyse your portfolio and assess if a particular stock is not doing well or the entire portfolio is underperforming as compared to your choice of a benchmark index. If a specific stock is underperforming, you may compare it with its sector performance. If its sector is also not performing well, you can stay invested.

However, if the industry underperforms, you need to seriously look for the reasons and consider selling the stock if it’s not expected to perform well in the future. If your entire portfolio is underperforming, you should consult an investment advisor to find the reason and rebuild the stock portfolio, if required.

In conclusion, every investment instrument plays a different role while achieving different types of financial objectives. So, compare the underperformance with a similar category of instruments that carry a similar level of risk, and put in thorough research to make informed course-corrective decisions, if required.

The writer is CEO, BankBazaar.com

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