Should I exit my focused mutual fund after 2 years of underperformance?

Approximately 80% of retail money flows into funds based on their last 1year of performance and historically 80% of those funds fail to repeat that performance the following year. Investors hire fund managers to navigate market cycles and not just to pick momentum stocks.

When SEBI warn of market froth, value-style fund managers often choose to sit outside the market. They refuse to buy stocks at valuations they cannot justify which inevitably leads to short-term underperformance and dropping in the rankings. A focused fund with a concentrated 30-stock deep-value portfolio requires immense patience.

The market cycle eventually turns and reverts to the mean, pushing those value funds back into the top quartiles. Investors closely track the funds they purchase but they almost never track what they redeem. So, if you look back at the performance of funds you sold in a panic, it often reveals the massive compounding you missed out on.

Chasing the highest 1-year return means you are constantly buying high and selling low. Wealth creation is not about how much you earn but how long you can hold your investments through their natural cycles.

Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.