Mutual fund returns dip? Here's why experts say don't switch in a hurry

Investors should resist the temptation to switch mutual funds simply because another scheme is delivering better returns, financial advisers said at the Business Standard Smart Investor Arena 2026. Instead, they should assess whether their investments continue to serve their financial goals and investigate the reasons behind a fund’s underperformance before making changes.

 

“Once you buy something, unless your life circumstances have changed, avoid changing it for at least three years,” said Vishal Dhawan, co-founder of Plan Ahead Wealth Advisors, during a session titled A Smart Investor’s Guide to Choosing Mutual Funds.

 

Dhawan was speaking about the importance of giving investments time to perform according to their intended role in a portfolio. He cautioned against confusing the monitoring of investments with the decision to sell or switch schemes.

  

Suresh Sadagopan, founder of Ladder7 Financial Advisories, said investors should also examine why they selected a fund in the first place and whether its investment approach has changed. Both speakers emphasised that fund selection should begin with an investor’s goals, financial circumstances and risk tolerance rather than a ranking of recent returns.

 

Don’t chase the best-performing fund

A fund that underperforms over a few months may not necessarily be a poor investment. Its performance could reflect the investment style it follows or the sectors in which it invests.

 

Dhawan cited the example of value and growth funds, which can perform differently under varying market conditions. Selling a value fund simply because a growth fund is doing better could undermine the purpose of holding both.

 

“The reason why you buy what you buy has to dictate what you do with the fund in terms of monitoring,” he said.

 

Investors should distinguish between temporary underperformance and a fundamental change in a scheme. Sadagopan said his firm typically reviews equity fund performance over six-month intervals. If a previously strong fund slips in its performance ranking but its investment approach remains unchanged, the adviser may wait another two or three quarters before deciding whether to replace it.

 

A change in the fund manager, a shift in the investment strategy or a material alteration in the underlying investment thesis could justify a closer examination, he said.

 

Investors should also reconsider their portfolios when their own circumstances change, such as when a financial goal approaches or their ability to bear risk declines.

 

Direct or regular plan? Consider the advice you need

 

The choice between direct and regular mutual fund plans should depend partly on whether an investor needs professional guidance.

 

Direct and regular plans of the same mutual fund scheme hold the same underlying portfolio, but their expense structures differ. Direct plans do not include distributor commissions, while regular plans include distribution costs.

 

Sadagopan argued that regular plans should not automatically be dismissed because they involve commissions. Investors who need help selecting funds, managing their portfolios and making decisions during market volatility may benefit from a suitable distributor.

 

“If you want to go to a distributor and you choose the right one, and if that person is earning a commission, I mean, what is wrong about that?” he said.

 

Dhawan said mutual fund investing involves three stages: selecting the right scheme, implementing the investment and managing it over time. While technology has made investing easier, deciding which fund suits an individual and ensuring that it continues to meet their needs may require professional guidance.

 

Investors should understand how their adviser is compensated and whether commissions could influence fund recommendations. Those confident of selecting and managing investments independently may prefer direct plans, while others should weigh the cost against the value of advice.

 

How many mutual funds should you hold?

 

There is no universal number of schemes that every investor should have. The appropriate number depends on financial goals, liquidity requirements, asset allocation and the need for diversification.

 

Sadagopan said a typical portfolio could contain 10-15 schemes, depending on the investor’s requirements. These could include funds for emergency reserves, short-term liquidity, equity exposure, fixed income and other asset classes.

 

“I am all for simplicity. I am all for manageability of the portfolio,” he said, cautioning against building an unnecessarily large portfolio.

 

Dhawan said some investors could meet their needs with just two broad investments, while others might require a wider selection. The difference depends on how they approach investing, their domestic and international exposure, and their use of active and passive funds.

 

The objective should be to avoid unnecessary overlap between schemes rather than target a fixed number.

 

Match funds to your goals and risk appetite

 

Young investors should not assume that their age automatically makes them comfortable with high-risk investments. Sadagopan said advisers should assess both an individual’s willingness to take risk and their financial capacity to absorb losses.

 

He recommended setting aside money for goals due within the next three years in investments that prioritise capital preservation rather than relying on equity funds.

 

Dhawan said young investors also need to understand the trade-offs between spending, saving and investing. “One part of our job is to actually help them understand that, allow them first to think expansively, and then narrow it down to what is really important to them,” he said.

 

Investors considering sectoral or thematic funds should also avoid concentrating their portfolios in a single theme. Sadagopan said he generally preferred diversified funds, although he saw a case for selective sectoral exposure.

 

“If you want a sectoral play or a thematic play, I would operate within a narrow band of maybe 10-15 per cent,” he said.

 

Ultimately, investors should select mutual funds based on their goals, investment horizon, risk tolerance and portfolio needs. Reviewing investments is important, but frequent switching in pursuit of the latest winning scheme can undermine a carefully constructed long-term plan.