Over two decades of managing client’s wealth, I feel the questions that investors generally ask, have changed significantly. However, one question that remains common among investors is “Why some of my mutual fund schemes are underperforming?” This often leads to a natural urge to move from Scheme A, which has not performed well recently (which probably may not be the right day/period for reviewing), to Scheme B, which appears to be a top performer.
At first glance, this line of thinking feels perfectly reasonable. If something isn’t performing, why not move to something that is? The problem is that this instinct often ignores why a fund is underperforming. And that distinction matters far more than the headline numbers. Before acting on this impulse, it is important to understand what underperformance truly means because not all underperformance warrants action.
Understanding the Reasons of Underperformance
The first and most common type of underperformance is point-to-point performance, that is, the returns measured from the day you invested to the day you review the fund. What many investors miss is that the day of review matters as much as the day of investment, regardless of whether the investment was a lump sum or through an SIP.
When we do a one-time investment, the point-to-point underperformance is often driven by the entry point. Investing close to a market peak can make even a good fund appear disappointing for a period of time. In an SIP, while the impact of a single-entry date is reduced, the market phase during which most SIP instalments were deployed plays a significant role. SIPs started during strong bull phases may look underwhelming when markets correct or move sideways, even though the investment process is working as intended.
Beyond this, markets move in cycles and so do funds. A fund may go through phases where its style, sector exposure, or investment approach is temporarily out of favour. If the review happens during such a phase, the fund can appear to be underperforming, even though its long-term potential remains intact.
This is why point-to-point underperformance, whether in lump sums or SIPs, is often a reflection of timing (of review), market cycles, or the fund’s own performance cycle, rather than a genuine deterioration in fund quality. Reacting to such short-term readings without this context can result in decisions that hurt long-term outcomes.
The second type occurs when a fund’s stock or sector selection does not play out as expected. While fund managers usually identify and correct such issues over time, there can be instances where recovery takes longer than expected resulting in even the 5 – 7 years’ performance to look bad for a certain period. As an investor, the process discipline (continuing the SIP and/or holding on to the fund) and patience matters the most in your favour. This is where fund manager’s skill and decision to either hold on to the sector or stocks with conviction or identify it as a miscalculation and move on determines how quick the recovery can be expected. This is precisely when investors need a trusted mutual fund distributor to help them stay the course. Their role is to help them navigate these complexities, ensuring that impulsive actions do not lead to missed opportunities or unnecessary tax liabilities.
The Investor’s Expectation: Always Be in the Top Quartile
Every investor would ideally like their invested funds to always be top-quartile performer.
But let us be honest. This expectation assumes perfect timing:
- Investing at the exact market low, or
- Entering the fund at its lowest valuation point
In reality, neither is consistently achievable. Even professionals cannot do reliably and consistently.
This is where long-term index data offers valuable perspective.
What Index Returns Reveal
When we step back and look at index return data, a fairly consistent pattern shows up. Over long periods, close to 90% of diversified equity mutual funds tend to move broadly in line with their benchmark indices, ending up marginally above or below them. That’s how markets are designed to work.
What often distorts investor expectations, however, is the memory of recent exceptional returns. Much of the excitement we see today is anchored to what the market delivered in the last five years – returns that were shaped by an extraordinary phase rather than a normal market environment.
Consider what happened around the COVID-19 crash in March 2020. Investors who had the courage or just the luck to invest during that period experienced phenomenal outcomes. The Nifty 50 went on to deliver annualised returns of over 20% as on 20th January 2026. Naturally, that experience reset expectations for many investors (most of them new to investing).
But markets don’t offer the same opportunity at all times. By December 2020, the sharp recovery was largely done, and indices were already close to their previous highs. Investors who entered the same Nifty 50 at that point and stayed invested till 20th January 2026 earned returns closer to 12%. Perfectly reasonable returns but far less exciting when compared to the earlier cohort.
The difference here is not the quality of the index or the investment itself. It is simply when the journey began. Same market. Same asset. Different starting points and therefore, different outcomes.
This is an important reminder that extraordinary returns are usually born out of extraordinary circumstances. Using them as a baseline for future expectations often sets investors up for disappointment, even when their investments are doing exactly what they are supposed to do.
Long-Term Perspective Matters More
When we talk about long-term equity returns, it helps to first set the right baseline. Over extended periods of 10 years and more, the Indian equity market as a whole has delivered annualised returns in the range of 11–13%. This is the return of the market itself broadly in line with the country’s economic growth (GDP + Inflation) over time.
A mutual fund investor should view this market return as the foundation. Diversified equity funds, whether flexi-cap or large & mid-cap, are not designed to defy the market, but to participate in it sensibly while managing risk. Over a full market cycle, some of these funds do manage to deliver returns that are slightly higher than broad market averages. This outperformance is usually incremental and gradual.
What makes the difference is the fund manager’s ability to allocate capital across market segments, rebalance portfolios across cycles, and stay disciplined when markets swing between extremes. Importantly, this value addition only becomes visible over time and often gets masked in shorter review periods.
For investors, the takeaway is simple but important. If your long-term portfolio delivers returns that are broadly aligned with market growth, with some periods of outperformance and some of underperformance along the way, it is doing its job. Expecting consistently superior returns, year after year, is neither realistic nor necessary for successful wealth creation.
The Real Risk: Switching Based on Recent Performance, Rankings and Stars
Investors today are constantly surrounded by noise of star ratings and “top-performing fund” lists that change every few months. Acting on this information often leads to a damaging pattern: entering funds after they have performed well and exiting them when they go through a temporary phase of underperformance.
Over time, this behaviour quietly pushes investors into buying high and selling low which is the exact opposite of what long-term wealth creation demands.
It is also important to remember that markets ultimately drive returns. Fund managers, at best, add incremental value over time through discipline and judgment. But no fund, however well-managed, is immune to market cycles or periods of discomfort.
A More Rational Way to Evaluate a Mutual Fund
Before deciding to exit a mutual fund scheme, take a pause and ask three simple but meaningful questions:
- Has the fund deviated from its stated investment objective?
- Has there been a fundamental change in the fund manager or investment process?
- Has my goal, time horizon, or risk tolerance changed?
If the answer to all three is “no,” then short-term underperformance may simply be part of the investment journey and not a reason to exit.
Wealth Is Built by Behaviour, Not Switching
Successful investing is rarely about ‘holding the best-performing fund’ at all times. It is about staying disciplined through uncertain phases and giving compounding the time and consistency it needs to work.
Very often, the smartest decision an investor can make is doing nothing at all and allowing time to quietly work in their favour.
Frequently Asked Questions
Answers to common questions related to this article.
Should I switch my mutual fund if it has underperformed recently?
Not necessarily. Short-term underperformance does not always indicate that a mutual fund is unsuitable. Market cycles, investment style, sector allocation, and the timing of your investment can all influence short-term performance. Before making any decision, evaluate whether the fund continues to align with your financial goals, investment horizon, and risk profile. Reacting to temporary fluctuations may interrupt your long-term investment strategy.
Why do good mutual funds sometimes underperform?
Even well-managed mutual funds can experience periods of underperformance. Different investment styles and sectors perform differently during various market cycles. A fund may temporarily lag its peers if its investment approach is out of favour, but this does not necessarily reflect poor fund quality. Evaluating performance over a complete market cycle provides a more meaningful assessment than focusing on short-term returns.
How often should I review my mutual fund portfolio?
Reviewing your mutual fund portfolio once or twice a year is generally sufficient for most long-term investors. Frequent reviews based solely on recent returns can lead to unnecessary switching and emotional investment decisions. A structured review should focus on whether your investments continue to support your financial goals, time horizon, and risk tolerance rather than short-term performance rankings.
What factors should I consider before exiting a mutual fund?
Before exiting a mutual fund, consider whether the fund has deviated from its stated investment objective, whether there has been a significant change in the fund management or investment process, or whether your own financial goals, investment horizon, or risk tolerance have changed. If none of these factors apply, temporary underperformance alone may not be a sufficient reason to exit the investment. You can also consider withdrawing from a mutual fund if you are closer to the goal for which you have been investing.
Can switching mutual funds frequently affect long-term wealth creation?
Frequent switching may interrupt the compounding process and could also result in transaction-related costs or tax implications, depending on the holding period and nature of the investment. Continuously moving investments based on recent performance can result in buying after strong performance and exiting during temporary weakness, which reduces the potential benefits of long-term investing.
Should I compare my mutual fund only with the top-performing funds?
It is good to understand what has worked for other mutual funds and what has not worked for your mutual fund during a particular period. However, comparing your mutual fund only with the latest top performers may not provide a complete picture. Performance rankings change over time as market conditions evolve. Instead, evaluate whether the fund continues to follow its investment objective, maintains a disciplined investment process, and remains suitable for your financial goals. Long-term consistency is generally more meaningful than short-term rankings.
Why is patience important in long-term mutual fund investing?
Long-term investing requires patience because markets move through different economic and business cycles. Temporary periods of underperformance are a natural part of investing in market-linked products. Staying invested in a well-chosen mutual fund that aligns with your financial objectives allows your investment strategy and the power of compounding to work over time, rather than being influenced by short-term market movements.
Shreedhara is the Founder & Director of Ara Financial Services Pvt. Ltd. He has an experience of over 2 decades in Financial Service Industry with majority of it in guiding individuals and institutions on their investments requirements.
