We use cookies
We use cookies to help this site function, understand service usage, and support marketing efforts. Visit Cookie Policy to change preferences anytime.
By Dhan Saarthi "8 mins read"
Most portfolio mistakes are loud. A wrong entry, a panic exit, a fund bought on a friend's tip — you notice these fairly quickly, because something visibly goes wrong. But the mistake that quietly does the most damage over time is different. It doesn't announce itself. It looks like patience.
It's the fund sitting in your portfolio that stopped earning its place two or three years ago — and you kept it anyway, because selling felt like admitting a mistake, and holding felt like giving it "one more year."
If your portfolio has multiple funds, a single weak performer rarely shows up in your overall returns. Your goal-based SIPs are still running, your total corpus is still growing, and the statement still shows a positive number next to the fund's name. Nothing about that looks broken.
The problem isn't visible in absolute terms — it's visible in comparison. A fund can be "up" in absolute return and still be quietly underperforming its category and benchmark, year after year, while a comparable fund in the same category compounds meaningfully faster. That gap doesn't show up unless you go looking for it.
One weak quarter, or even one weak year, is not underperformance in any meaningful sense — most funds have periods where their style, sector tilt, or market-cap bias is temporarily out of favour. This is normal and expected.
What deserves scrutiny is a pattern: a fund that has lagged its category average and its benchmark across rolling 3-year periods, not just a single snapshot. Rolling comparisons matter more than point-to-point ones because they smooth out short-term noise and show whether the underperformance is consistent or a one-off.
Alongside consistent numbers, a few structural signals matter just as much as returns:
Exact thresholds for "how many years" or "how much underperformance" can vary by category and market cycle — this is a judgment call best made against your specific fund's data rather than a fixed rule, and worth verifying against the fund's actual factsheet before acting.
It's natural to believe a fund that once performed well will "come back." Sometimes it does. But hope is not a strategy, and the honest question to ask is whether there's a specific, evidence-based reason to expect recovery — or whether you're simply waiting for the discomfort of deciding to pass.
Redeeming one fund, choosing a replacement, and re-investing takes more effort than doing nothing. Inertia is a real and underrated reason investors hold on to funds long past their usefulness.
Many investors treat an exit as the moment a loss becomes "real," even though the underlying value was already lost the moment the fund underperformed — the exit just makes it visible. Staying invested in a weak fund doesn't undo underperformance; it only postpones the decision.
Instead of a single yes-or-no decision, it helps to sort an underperforming fund into one of three categories:
Watch — The fund has had a weak year but the underperformance isn't consistent across rolling periods, and there's been no change in manager or mandate. Reasonable to monitor at the next review rather than act now.
Wait — There's consistent but modest underperformance, and a specific, near-term reason to expect improvement (for example, a portfolio repositioning already underway). Worth a defined re-check point — not an open-ended "one more year."
Exit — The fund has consistently lagged its category and benchmark across multiple rolling periods, and/or has seen a manager or mandate change that removes the original reason you chose it. This is the point where holding on is costing you more than switching would.
Deciding to exit is only half the decision — how you exit matters too. A few things worth checking before you redeem:
None of this should stop you from exiting a genuinely weak fund — it should just make the exit deliberate rather than reactive.
Not every underperforming-looking fund deserves an exit. If the fund's category itself has been out of favour across the market (for instance, a value-oriented fund during a growth-led rally), and your fund's relative standing within that category hasn't actually slipped, the fund may simply be waiting for its market cycle — not failing.
The distinction is straightforward: are you comparing the fund to its category and benchmark, or just to a market index that isn't really its peer group? Getting the comparison right is what separates a genuine mistake from a fund doing exactly what it was built to do, at a point in the cycle where that isn't fashionable.
Not sure if a fund in your portfolio is genuinely underperforming or just out of cycle?
Get Your Portfolio ReviewedUnderperforming funds rarely cost you in a single dramatic moment — they cost you slowly, in the compounding you don't earn while a better-fit fund quietly does more of the work elsewhere in your portfolio. The way to catch this isn't more anxiety about your portfolio; it's a periodic, criteria-based check against category and benchmark, so the decision to hold or exit is based on evidence rather than habit.
If you haven't looked at your funds this way recently, that's a reasonable place to start.
