Why Your Mutual Fund is Underperforming — And Why That Might Be Good News

By
Hemant Beniwal
-
66
HDFC Funds are doing bad & I am Happy about that

Last Updated on April 5, 2026 by Hemant Beniwal

A client called me recently. Frustrated. His large-cap fund had lagged its peer average for nearly two years. He had done his research — screenshots of return tables, star ratings, everything.

“Hemant, I want to move this to a top-performing fund. Tell me which one.”

My answer: “I’m actually happy your fund is underperforming right now. Don’t move.”

He went quiet. Then: “Are you serious?”

I was. And by the end of that conversation, so was he.

⚡ Quick Answer

Short-term underperformance in a well-managed fund with a sound investment philosophy is not a reason to exit. The most expensive mistake Indian mutual fund investors make is exiting disciplined funds during their lean phases — right before the cycle turns. This post explains why, and what to watch instead of return rankings.

Why You Chose an Active Fund in the First Place

When you invested in an actively managed fund, you made a decision: “I want a professional to beat the market over time.” Not over three months. Not over one year. Over a full market cycle — typically 7 to 10 years.

If your performance horizon is six months, you chose the wrong product. Index funds exist for a reason.

But if your goal is genuine long-term wealth creation — retirement corpus, children’s education, financial independence — then you need to think like the fund manager you hired, not like a trader watching daily NAVs.

The 2007-2008-2009 Lesson That Nobody Talks About

Let me tell you a story that shaped how I think about fund underperformance.

At the end of 2007, some of India’s best-known large-cap funds were lagging their peers significantly. Investors were angry. Distributors were fielding calls. The funds saw heavy redemption pressure — investors exiting to chase the “better” funds of that moment.

Then came 2008. Markets fell nearly 55% from peak to trough. The conservative, value-oriented funds that had lagged during the bull phase fell far less than their aggressive peers. They preserved capital when it mattered most.

Then came 2009. Markets recovered sharply. The funds that had protected the downside now participated fully in the recovery — while the “top-performing” funds of 2007 that investors had fled into were still rebuilding from deeper losses.

The Full Market Cycle — A Simplified Illustration

Why Downside Protection Wins Long Term

2007 Bull Phase

Conservative Fund Lags

Investors frustrated. Redemptions rise.

2008 Crash

Conservative Fund Falls Less

Capital protected. Corpus intact.

2009 Recovery

Conservative Fund Outperforms

Investors who exited missed this entirely.

Illustrative of general market behaviour. Not specific fund data.

The investors who exited the conservative funds in 2007 did not benefit from the 2009 recovery. They bought high in the “hot” funds, sold low in the crash, and missed the bounce. Every step of that sequence was driven by emotion, not logic.

This is not an isolated historical curiosity. The same pattern has repeated in 2013, in 2020, and again in 2022-23. The cycle does not change. Only the fund names do.

The Bubble in “Quality” — A Warning That Ages Well

There are periods in every market cycle when certain categories of stocks become popular to the point of being expensive. Fund managers who chase these stocks look brilliant during the momentum phase. Fund managers who avoid them look like they are missing the bus.

Value-oriented fund managers who avoid expensive popular stocks will lag their benchmarks during momentum phases. This is not a failure of process — it is the process working as designed. When the expensive stocks correct, the value manager’s portfolio holds up better.

The question to ask is not “why is this fund underperforming right now?” The question is: “Is the fund manager sticking to the investment philosophy I hired them for?”

If yes — patience is the right response. If the investment philosophy itself has shifted, that is a different conversation.

The Most Expensive Gap in Investing: Returns Vs Investor Returns

Here is a fact that should make every mutual fund investor stop and think.

Peter Lynch managed the Magellan Fund at Fidelity from 1977 to 1990 and generated over 29% annual returns — a record that outpaces Warren Buffett’s publicly reported equity returns over the same period. One of the greatest fund management track records ever assembled.

The average investor in that fund? Made less than 15%.

⚠️ The Behaviour Gap

Investors entered the Magellan Fund after strong performance periods and exited after weak ones. They consistently bought high and sold low — not because they were foolish, but because they acted on emotion. The fund returned 29%. They captured 15%. The difference is pure investor behaviour.

This gap — between what a fund earns and what its investors actually capture — is the central problem in personal finance. It is not solved by finding better funds. It is solved by better investor behaviour.

This is the core argument of my book Modifying Investor Behaviour — that the biggest threat to your wealth is not market volatility or poor fund selection. It is the sequence of decisions you make when your portfolio is uncomfortable.

What You Should Actually Do When Your Fund Underperforms

Not exit automatically. Not chase the current top performer. Instead, ask three questions:

1. Has the investment philosophy changed? A value fund that suddenly starts buying momentum stocks has changed. A fund manager who quietly shifted the portfolio away from the stated mandate has changed. If the philosophy is intact — the underperformance may be a feature, not a bug.

2. What is the quality of the portfolio today? A fund holding undervalued businesses with strong fundamentals that are temporarily out of favour is different from a fund holding structurally weak businesses. Look at what the fund holds, not just what it has returned.

3. Is the underperformance consistent with the fund’s style in this market environment? A value fund will lag in a momentum market. A quality fund will lag in a recovery rally driven by beaten-down cyclicals. Style-consistent underperformance is not a red flag. Style-inconsistent underperformance is.

💡 The Right Diversification

Exposure to 4-6 fund houses with different investment styles is a more robust approach than concentrating in one AMC. When your value manager is lagging, your growth manager may be leading — and vice versa. Diversification of fund manager style is as important as diversification of asset class.

One Honest Disclaimer

I am not claiming any specific fund will outperform in the future. I have no idea which investment strategy will do better in the next 3 years. Neither does anyone else, regardless of how confident they sound on television.

What I do know — from 25 years of sitting across from investors during market cycles — is that the exit decision made during peak frustration is almost always the wrong decision.

The investor who exited the conservative fund in December 2007 locked in their underperformance, missed the downside protection in 2008, and missed the recovery in 2009. All three bad outcomes came from one impatient decision.

Is your portfolio built for patience — or just for recent performance?

A structured review helps separate signal from noise. Which funds are worth staying in, which need watching, and which genuinely need to go.

Talk to a RetireWise Advisor

Frequently Asked Questions

How long should I wait before exiting an underperforming mutual fund?

A minimum of 3-5 years of underperformance relative to peers — not just benchmark — warrants a serious review. One or two bad years in an otherwise consistent fund with an intact investment philosophy is not a signal to exit. The key question: is the manager’s process still sound?

Why do mutual fund investors get lower returns than the fund itself?

This is the behaviour gap. Investors buy after strong performance and exit after weak performance — systematically buying high and selling low. Peter Lynch’s Magellan Fund returned 29% annually for 13 years. The average investor in that fund made less than 15% because of poorly timed entries and exits.

What is downside protection in mutual funds?

A fund’s ability to fall less than peers or benchmark during market corrections. A fund that falls 30% when peers fall 50% — and then rises proportionally in recovery — will outperform aggressive funds over a full market cycle even if it lagged during the bull phase.

Is it okay if my fund underperforms for 1-2 years?

Yes — if the investment philosophy is intact. Value funds and contra funds typically underperform during momentum-driven markets and outperform during corrections and recovery phases. Style-consistent underperformance is a reason to stay, not exit.

How many fund houses should I have in my portfolio?

Exposure to 4-6 fund houses with different investment styles is a reasonable approach. Having all equity in one AMC concentrates both performance and operational risk. Different managers will lead at different points in the cycle.

The investors who made the most money from India’s equity markets over the last 25 years were not the ones who found the best funds. They were the ones who stayed in decent funds long enough for compounding to do its work.

Do the Right Thing and Sit Tight.

💬 Your Turn

Have you ever exited a fund during underperformance and later regretted it? Or stayed in one when everything said exit — and been rewarded for patience? Tell us below.

66 COMMENTS

  4. All Asset Classes revert to the mean.

    Real Estate may go up 50% in one year but over a 15-20-30 year period the cagr will be 7% to 8%. In addition you should be 2% to 3% in rental returns. Cumulative returns will be 10% to 12%

    Equities may go up 25% in one year but over a 10-15 year period the cagr will be 10% to 12% especially after including dividends

    Within Equities there may be a deviation for a period of time with large cap growth stocks enjoying dramatic increase due to herd instinct for safety. This is particularly true when there is a lack of trust in financial markets. When auditors have been negligent or complicit in fraud. When rating agencies have been negligent or complicit in fraud. Suddenly corporate governance cannot be taken for granted.

    Eventually sanity will return and we will see a reversion to the mean when mid-cap and small cap value stocks should find their rightful place in the sun.

    • Hi Rau,
      Thanks for sharing your views – hope this will help other readers to understand “revert to the mean concept” & also having the right expectations.

  9. Good article for current market conditions. But missing some info like “when market performing good we need to wait and when market at bad condition need to add more instead coming out” of that particular fund. Since before investing we will do some study, simultaneously we need to give some time to market and to fund manager for better growth together.

  10. There is so many funds and reports of performance of each fund. How to select right fund and what should be right strategy to monitor the performance of the fund. Can you provide some inputs on these aspects?

  14. I am following your articles since last 8 years, I have been a regular reader since then but out of all your articles I find this article the most disappointing one. You have always been an advocate of having diversity but you said your investors to invest in maximum 2-3 funds. Yes that was in 2011-12. In 2019, now you yourself have increased it to 5-6 fund houses? Your suggestion of increase in number of funds is due to the uncertainty of market that you have talked about at the end of your article.

    • Hi Manoj,
      I thank you for being one of the most active readers on the blog 🙂
      Coming to the point that you have raised – I don’t remember if I ever said a maximum of 2-3 funds or fund houses in any blog post. It may be possible that someone asked a specific question about his situation (maybe very small amount to invest on a monthly basis or just talking about investing in ELSS) – in that case, I may have suggested lesser funds.
      Bw we have completed 10 years in Financial Planning practice & from day one we are suggesting our clients have exposure in 5-6 fund houses.

  15. Good article for current market conditions. But missing some info like “when market performing good we need to wait and when market at bad condition need to add more instead coming out” of that particular fund. Since before investing we will do some study, simultaneously we need to give some time to market and to fund manager for better growth together

  16. Units of good mutual funds are Assets. When investors mindset changes to accumulation of these assets for achieving long term goals, then they will surely enjoy underperformance during polarised market conditions. Choice is between short term notional gain or long term real gain. Choice is between making money or creating wealth. Your timely article is helpful to understand this in simple way.

  18. All those cursing and regretting investments in MF should read this hard hitting article.Any one selecting a MF based on current rating of a Scheme which is based on last 1 year performance will join the band of cursors after a year. If you stay within the Top 4 or 5 Fund houses and choose to wait for 3 to 5 years with a target of not more than 10 to 12 % post tax -5 year CAGR , you are doing well. Why bother about temporary slides .
    Stay close to Prashant Jain Types – Invest and forget it.

  19. Good article. But I still do have a question in what is the right amount time to move away from a fund? After how much time of underperformance (1 year-2 year) or what other factors should the investors consider before making the switch?

    • Hi Chirag,
      I will suggest you check the 5 points that I have shared. If questions are specific about underperformance – it should be atleast 2 cycles, One Up & one Down.
      I think that the secret guide that I shared with you will help. 🙂

  21. Right article at the correct time. People would be wondering why market is going up but my fund returns are not going up proportionately

  23. What about the poor quality stocks in his portfolio like SBI , canara bank who have an history of surviving on and burning tax payers money given as doles by the government

    • Hi Ujjwal,
      I don’t want to comment on specific stocks but fund managers don’t have compulsion to buy “poor quality stocks” so there may be a reason why the hold them.

  24. Nice refresher to be cool, calm and logical in these times when only few stocks or MFs are performing and giving returns but not many are talking about the risks these stocks/MFs hold. Equity investments is a long term game and not for the faint hearted. Asset allocation is the key to attaining wealth and have portfolio stability at the same time and keep your heart beat in check.
    I am an avid reader of your blogs, posts..they are different from the lot…Thanks again.

  25. The present scenario in the equity markets is very dicey.Many of the blue chips are at record highs. many midcaps & small caps have taken a severe beating in values. The problems in the NBFC sector have increased specially after the collapse of ILFS. Many mutual funds having exposure to the NBFC sector have also been badly affected. What is the way forward for individual investors?

  31. Thanks Hemant for nice analysis.
    Mr. Prashant Jain and Mr. Sunil Singhania (now left Reliance MF so ex Fund Manager) are best money managers in country. They understand our domestic equity markets most efficient way.
    The current market behavior is very weird and irrational. Most of the benchmarks (excluding nifty 50 and. Sensex 30) are underperforming. It implies the companies (bse 500) are not performing well which also can be seen in macro data. So unless the economy starts to kickoff, market will miss the multiplier impact. So fund value will also not be multi folded.

  34. Dear Hemant
    I was studying turnover ratios of few mutual funds. Few Hdfc funds turnover ratio is below 9% and Index fund turnover ratio is above 16%. I am bit confused why active fund managers turnover ratio is below 10% which is reflected in their performance. What is your take on this?
    Do you agree with value style investing in most of the HDFC funds?

  35. Dear Hemant
    I was studying turnover ratios of few mutual funds. Few Hdfc funds turnover ratio is below 9% and Index fund turnover ratio is above 16%. I am bit confused why active fund managers turnover ratio is below 10% which is reflected in their performance. What is your take on this?
    Do you agree with value style investing in most of the HDFC funds?

  36. Thank you for sharing this great article, all the content inside is very suitable for everyone, the accompanying image is also a lot of quality. Hopefully the next article will be better to be useful to everyone.

  38. The story heading is why hdfc mutual fund is doing bad. But you never said why it is doing bad. please explain in simple terms. I lost more than 12 laks is hdfc mutual fund. Now i am at risk that i cannot sell or hold
    please guide me

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