Your mutual fund is underperforming. Should you switch to another fund or wait?

A fund lagging its peers may not always warrant an exit. Here’s what to check before switching.
Representative Image: Should you switch to another fund or wait Don’t switch funds based on short-term underperformance.Assess fund performance over 3-5 years vs. benchmark.Consider portfolio fit, not just recent top performers.Did our AI summary help? Market MasteryWebinar by Vishal Malkan Find the weak linksin your portfolio by Vishal Malkan Register for FREE Webinar Register for FREE

A mutual fund in your portfolio has been lagging its benchmark. You check other funds in the same category and several are doing much better. Switching can seem like the obvious thing to do. Why stay with an underperformer when better-performing funds are available?But before exiting, investors need to figure out whether the underperformance is temporary or persistent, whether something has changed in the fund and whether the replacement will actually make the portfolio better.And if the decision is to move, should one stay with the same asset management company (AMC) or look elsewhere?Also Read: SIP returns at zero after 2 years? Here’s what happened when investors continued for 3 more One bad year? Look a little deeperSeeing a fund near the bottom of the one-year returns table can be uncomfortable. But one year may be too short a window to judge an equity fund.“Investors often tend to fall prey to recency bias, by looking at recent performance in order to make allocation decisions,” says Chirag Muni, Director, Anand Rathi Wealth.He suggests assessing performance over three to five years and comparing the fund with its benchmark and category average.Rankings can change quickly. Muni points to Quant Large Cap Fund, which, according to data shared by him, was among the better performers in 2023 and 2024 but ranked 35th out of 35 schemes in 2025, with a return of under 3 percent. In 2026 so far, it has climbed back to second place.There is another question to ask: is your fund struggling, or are similar funds going through the same phase?Aditya Agarwal, Co-Founder, Wealthy.in says, “Investors should see whether the fund is losing because its investment style is out of favour, or whether it is also losing to other funds following a similar style. If comparable funds are doing considerably better, there may be more reason to investigate.”So, a negative return doesn’t necessarily mean a fund has failed. What matters is how it has performed relative to its benchmark and relevant peers across different market conditions.Also Read: Own flexicap and large-cap funds? Nearly 64% of their equity exposure may be commonWhen does underperformance become a reason to exit?“Persistent underperformance is a reason to investigate, not a reason to sell. On its own it is a symptom. What justifies an exit is a cause,” says Agarwal.If a fund has consistently trailed its benchmark and category peers over three to five years, investors can look deeper. Has the fund manager changed? Has the investment strategy shifted? Has its portfolio positioning changed significantly?Experts say the reason to exit may not even be that the fund is “bad”. An investor’s goal or risk capacity may have changed, or the scheme may now create substantial overlap with other funds in the portfolio. In such cases, exiting can be a portfolio decision rather than a verdict on the fund.Don’t replace yesterday’s laggard with today’s winner Once an investor decides a fund isn’t working, picking one near the top of the current returns table can be tempting.But today’s winner may not remain there. Muni cites Motilal Oswal Midcap Fund, which, according to data shared by him, was the top-ranked mid-cap fund in 2024 with returns of more than 57 percent, but moved to the bottom of the category in 2025 with a negative return of more than 12 percent.Instead of simply asking which fund has performed best recently, Muni explains, “Investors should assess whether the replacement fits their portfolio. Longer-term consistency, investment strategy, portfolio concentration, overlap with existing holdings and suitability for the investor’s goal all matter.”Also Read: Why are average returns so hard to earn? Small-cap funds gave return of 14.8%, but investors lost 1.6%Unhappy with the fund? Redemption isn’t the only optionSuppose an investor doesn’t want to continue putting fresh money into the fund. That doesn’t automatically mean the accumulated investment has to be redeemed.One option is to stop the SIP and direct future investments elsewhere while continuing to hold the existing units.Kirang Gandhi, Director, Kaarmika Wealth Mentors says, “This can make sense if the fund’s strategy still fits the investor’s goal but confidence in the fund has reduced.This separates two decisions: where should future SIP instalments go, and what should happen to the money already invested?The existing corpus needs to be assessed separately because redeeming can have tax and exit-load implications.Vijay Maheshwari, Founder, Stocktick Capital says, “Redemption may be more appropriate when there is persistent underperformance, a material change in strategy or fund management, excessive portfolio overlap, higher risk or the fund no longer fits the investor’s objective.”Also Read: Rs 10 crore by age 60: How much SIP do you need if you start at 25, 30, 35 or 40?Same AMC or another AMC: Does it really matter?If the decision is finally to move the accumulated investment, switching to another scheme within the same AMC can be operationally easier. But should that influence which fund an investor chooses?“Convenience can have some operational value, but it should not determine the investment decision,” says Maheshwari.Investors should first identify the kind of fund their portfolio needs, compare suitable schemes across AMCs and then choose. If two options are otherwise comparable, convenience can be a consideration, but it shouldn’t drive the decision.There is also an important catch: switching within the same AMC doesn’t automatically avoid tax or exit load.Also read: How much can you actually pay through UPI? The limits are not the same for everythingFor an inter-scheme switch, experts say the switch-out is treated as a redemption and the switch-in as a fresh purchase. Capital gains tax can therefore arise, while exit load may apply depending on the scheme and holding period. Moving to another AMC similarly involves redeeming the old investment and making a fresh investment.So, the main advantage of staying within the same AMC is operational convenience, not a blanket tax advantage.Move everything at once?Even after deciding to exit, the entire corpus doesn’t necessarily have to move immediately. Tax implications, exit load and the reason for leaving the fund should determine whether the investment is moved at once or gradually.But staggering the exit isn’t automatically better either, since every switch-out is still treated as a redemption.The key is to make switching the last step, not the first. Before asking which fund to move to, investors need to establish what is wrong with the existing fund and whether the replacement actually fixes it.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.