Long term relationships are difficult to sustain. It takes a lot of effort. You need to keep in touch – whether it is friendship, marriage, etc. Oops sorry, here we are talking about fund management. It is always nice to be holding funds for real long times. I have held Franklin India Bluechip, Hdfc Top 100 (when it was 200), Hdfc Prudence (now under a new name), FT Prima, Franklin Pension, Hdfc CGF (invested on the day my daughter was born, and still holding on, my daughter is about to finish college). I guess it is some laziness, and some good performance. Not that these funds have always been at the top of their class, but yes I am happy with the returns. Remember most of my portfolio is in direct equity, so this is marginal, at best.

  1. When there is sustained under performance – when a fund under-performs for say 2 years, one should get worried. Especially if you do not know why there is under performance. Look at Franklin India Blue-chip. I know that the under performance vis-a-vis the Index is because this fund house does not invest in Reliance. I would be more worried if they bought Reliance now UNDER PRESSURE from the markets. I want them to stick to their conviction. I now own only 200 shares of RIL – otherwise as a trader/investor I have no position. I am fine with that. However, 3 years of under performance, a not so unique portfolio, and the costs of a ‘managed’ fund are sure signs that one should consider an exit.
  2. When you wish to leave that class of equity – for example there is a lot of pressure that the large cap funds may not out-perform the index. So maybe it is time to move from managed “large cap” to other classes. For example why not move from Indian large caps to US large caps? I mean Alphabet and Amazon should be part of your portfolio, not just Hdfc bank, Infosys and Reliance. You are not moving out of poor performance, but to a different category which did not exist earlier perhaps?
  3. When the fund manager leaves – when the fund manager of the fund which you were managing leaves, you might consider leaving. However remember when L&T Mutual fund took over Fidelity, it was surely a sell call. However if you held on and reviewed after 4 years, the performance was not bad at all. When Naren gave up the day to day management of Icici Pru Discovery, I did consider quitting, but just stayed on. No, I have no regrets. I am sure that Naren manages the philosophy of the fund and the fund itself has a new manager who operationally looks after the fund. So it is your call.
  4. When the fund size explodes – you invested in a fund with Rs. 3000 crores in mid and small cap. The fund performed brilliantly. Then we threw money at the FM and made it a Rs. 14000 crore fund in 2 years time. Now you need to check whether the fund house and the FM have the ability to create GOOD portfolio to manage this size. It is a good time to say good bye if you see the FM struggle – means he has to go down on corporate governance, etc. Exit, if you think that the fund will not perform.
  5. When another opportunity presents itself – you have invested in a multi cap fund and that fund has grown to be a Rs. 28000 crore fund. You are wondering what to do – when you find that the FM has shifted to another fund house and is managing a Rs. 300 crore fund. I do think it is a great time to shift. There is no reason why you should be in the big fund. After all the smaller fund could be far more nimble.
  6. When a fund changes its mandate – let us say you invested in a Rs. 4000 crore midcap fund, and the fund becomes a Rs. 20,000 crore fund. The fund manager starts buying large cap stocks, or changes mandate to invest in US stocks. Here you are telling the fund manager – ‘Hey you have changed’. If you are sure that you want separate funds for large cap (maybe low cost index /etf is the core), mid cap, and small cap – you may not want a multi-cap fund which tries to be everything for everybody.

So you see that under performance or non performance should not become an auto trigger for exiting. It should however trigger a review. There has to be a strong reason for you to stay on with an expensive fund house when cheaper options are available. For example Motilal Oswal can give you an aggressive large cap fund (concentrated) while Hdfc / Franklin Templeton may give you a more diversified large cap fund. It is your call whether you want to pay the costs of being in a managed large cap fund. The alpha COULD come from concentration or from spreading far. The alpha may not sustain for more than 2 years – all possibilities exist. Take your pick.

Trust your fund manager, but verify regularly that he is on the same path. After all you do not want to get Pepsi in a Coke bottle, do you?

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  1. One must have clear Exit Strategy at times of Entry.
    Post helps outline such a strategy.
    All time answer, Goal Based Investments simplifies Exit strategy as & when goal post is in sight.
    Dr.Rajnikant Gajjar

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