Red Signals one must look for in Mutual Fund

Many times investors continue with their investments despite the volatility in the markets. Nevertheless, sometimes it is best for the investors to move out of a fund. Here are some reasons to exit a fund.

1. Deteriorating fund performance

One must be cautious about the consistent decline in the performance of a fund. This is one of the major red signs which one must not ignore. It is vital to compare the performance of the fund with its peers and not just with markets. Compared to its peers if a fund is performing poorly, then it is one of the signs to quit from that fund.

2. Frequent change in the Fund Manager

There is some or the other problem with a fund if fund manager changes very often. This is also one of the major warning signs. When there is a lot of churning happening in the senior management posts, one must avoid the fund.

3. Increase in Standard Deviation

Increase in Standard Deviation is a sign that the fund is giving inconsistent performance. Standard Deviation of a fund measures the volatility of the returns of a fund as against its average. For Example, if a fund’s average rate of return is 15 per cent and has a Standard Deviation of 5 per cent, it means that the fund’s returns would range from 10 to 20 per cent.

4. More Redemption

Even if there are no red signals seen, there are others who have a reason to move out of a fund. When there are huge redemption it is a good idea to exit the fund. Huge redemption generally happen when the performance of the fund is a thing to worry about and investors have lost their confidence.

5. Change in asset allocation

Change in asset allocation defeats the purpose of investment for which investor has put his money. This may happen due to the new asset allocation strategy or it may even happen if two funds have been merged. Post merging of the funds, if the asset allocation strategy is still intact then there is no problem, but if not, then the investor would be better off by exiting from such funds.

Apart from the above reasons, it is always safe to exit from such funds wherein the fund managers are not acting in the interest of investors. Even when the fund manager is diverting from the fund objectives or when there are lots of inflows in a fund which a fund house can’t manage, it’s good to exit from such funds.

Investors may also opt to exit from the funds even though the fund is performing well and there are no such red signals, this is when the funds no longer serve investors financial goals.