The short answer
One bad year, on its own, is rarely a good reason to exit a fund. Every good fund has bad years. What matters is why it did badly, and whether it’s doing worse than funds like it over a longer stretch: two to three years, not twelve months.
Exit when the reason is about the fund, not about the market.
First, ask: did the fund fall, or did the market fall?
If markets fell 15% and your fund fell 14%, your fund didn’t have a bad year. The market did, and your fund did its job. Selling at that point usually means locking in a loss just before prices recover.
The fair comparison isn’t “did I lose money?” It’s “did this fund do worse than it should have?” For that, you need the right yardstick.
Compare with the right yardstick
Every fund’s monthly factsheet names its benchmark — the index it’s trying to beat. A large-cap fund should be compared with a large-cap index, a mid-cap fund with a mid-cap index, and so on. Comparing a mid-cap fund with a bank FD, or with last year’s best-performing fund, tells you nothing useful.
It also helps to compare with the average of similar funds in the same category. If most mid-cap funds had a poor year, your mid-cap fund having a poor year isn’t a warning sign.
Finally, look at longer periods. A fund’s investing style can be out of favour for a year or two, then come back strongly. Judge it over three years or more, not over one.
A simple way to decide
| What happened | Should you exit? |
|---|---|
| The fund fell because the market fell | No |
| It did worse than similar funds for one year | Not yet. Keep an eye on it |
| It has trailed its benchmark and similar funds for two to three years | Review it seriously. Often, yes |
| The fund has changed its strategy or category | Review whether it still fits your goal |
| The fund manager has changed | Watch closely, but don’t rush |
| Your goal is now only a year or two away | Yes, move the money somewhere safer |
| You own several funds doing the same job | Consolidate, keeping the stronger ones |
An example
Say you hold a mid-cap fund that’s down 18% over the past year. That sounds alarming. But if mid-cap funds as a group fell about 20% over the same year, your fund actually did slightly better than most. There’s nothing to fix.
Now imagine a different fund that has returned 8% a year over three years, while its benchmark returned 13% and most similar funds returned 12% to 14%. Nothing dramatic happened in any single year, but it has been quietly falling behind. That’s the fund to look at.
Before you exit, check the cost
- Exit load: many equity funds charge about 1% if you sell within a year of investing. Check the factsheet for your fund.
- Tax: for equity funds, gains on units held for more than a year are taxed at 12.5% above ₹1.25 lakh a year; gains on units held for less than a year are taxed at 20%.
- Timing across years: if you’re exiting a large holding, spreading the sale across two financial years can let you use the ₹1.25 lakh tax-free limit twice.
A switch that costs more in tax and exit load than it’s likely to gain isn’t worth making.
What we’d usually suggest
- Review your funds once or twice a year, not every time you open an app. Short-term moves create a lot of noise and very little useful information.
- Decide your reasons for exiting in advance. For example: “I’ll review any fund that trails its benchmark and category for two years running.” It stops a bad week from turning into a bad decision.
- Stop before you sell. If you’re unsure about a fund, you can stop new SIPs into it and send that money elsewhere, while leaving the existing investment alone. It gives you time to decide without paying any tax.
- Replace, don’t just remove. If you exit a fund, know where the money is going and what job it will do there.
If you suspect you hold too many funds that overlap, our post on how many mutual funds you should own covers that separately.
When it’s different
- A debt fund has a credit problem. If a company that a debt fund lent to defaults or is downgraded, and the fund’s value drops sharply, that’s a real problem with the fund, not market noise. Act sooner.
- It’s a sector or theme fund. Funds focused on one industry or theme can stay out of favour for many years. If you bought it on a tip or during a trend, it may never have fitted your plan. Reassess whether you need it at all.
- You never really needed it. Sometimes a bad year simply draws attention to a fund that was bought for the wrong reason. That’s a perfectly good reason to exit, as long as you check the cost first.
CurateMyMoney is an AMFI-registered mutual fund distributor (ARN-184811). Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. Tax rules mentioned are as applicable at the time of writing and may change; please check the current rules or consult a tax professional before acting.
