Is your mutual fund not offering any return in last two years? Experts suggest a balanced exit strategy

Market cycles have a way of testing every investment strategy, and quant-based mutual funds are no exception. While these funds often deliver strong returns during favourable trends, they can struggle when market conditions shift or become unpredictable and this makes many investors reassess their exposure in such funds.

This is the case with A Narayanasamy, an investor and a viewer of The Money Show on ET Now, who invested Rs 5 lakh in the SBI Quant Fund in 2024 and the fund was launched on December 26, 2024. Since then, the fund has slipped into losses, leaving him concerned about what he should be doing and what should be the exit strategy.

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According to market expert Abhijit Chokshi, the fund has underperformed by around 5% over the past one-and-a-half years. However, this needs to be viewed in the broader context of market movements.

Compared to direct exposure in midcap and smallcap stocks, which have seen sharper corrections, the fund has been relatively in better shape. The underperformance has largely been driven by external factors such as global uncertainties, persistent foreign institutional investor (FII) selling, and valuation compression across equity markets.

“So relatively it has not underperformed if we compare to midcap or smallcap direct equity. It is relatively in better shape. However, the major reason is obviously the global issues and the FII selling and the valuation compression happening,” the expert said.

A quant fund is a type of mutual fund that uses mathematical and statistical models or pre-determined algorithms to arrive at an investment decision based on which trades can be carried out. Since these proprietary system-based models are structured around certain criteria, no human judgement is involved. The fund manager builds the portfolio based on the output generated from these mathematical models, according to Nippon India Mutual Fund website.

In Narayanasamy’s case, Chokshi suggests a balanced approach rather than a complete exit. He recommends partially redeeming the investment, around half of the Rs 5 lakh, even if it involves booking a small loss.

“So, in his case what I would suggest that he should do a hybrid approach wherein what he can do is that he can sell half of the fund and at a minimum loss of 5,000 and he can actually use it for the tax harvesting purpose as we are nearing the financial year end,” the expert said.

This can also serve as an opportunity for tax harvesting, particularly as the financial year draws to a close. The redeemed amount can then be redeployed into more stable and diversified options such as a Nifty 50 Index Fund or a large-cap oriented fund, along with a portion allocated to a diversified strategy like the Parag Parikh Flexi Cap Fund.

At the same time, he advises holding the remaining investment in the quant fund for a longer horizon of around five years. With markets having corrected from recent highs, there is potential for recovery over time. A disciplined and diversified approach could help the overall portfolio generate reasonable returns over the next five to seven years, provided market conditions stabilise.

“Remaining 2.5 lakh in his SBI Quant he can hold and with an actual time period of five years which will give a reasonable recovery upside now that we have fallen quiet from the highs. What I expect after this changes he can expect a good 8 to 9 lakh in next five to seven years if he is able to maintain this exposure, " the expert said.

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The broader lesson for investors is to avoid concentrating their portfolio around a single theme or strategy. Funds that perform well during a particular phase may not necessarily sustain that performance across different market cycles. Quant funds, in particular, should be treated as a supplementary allocation rather than a core holding.

Chokshi emphasises that allocation to such funds should ideally be limited to 5–10% of the overall portfolio and suited primarily for investors with a higher risk appetite and longer investment horizon. For those nearing retirement or seeking stability, a greater focus on large-cap or index-based investments may be more appropriate.

Ultimately, successful investing lies in maintaining balance and discipline. Rather than reacting to short-term performance, investors should align their portfolios with their financial goals, risk tolerance, and time horizon, ensuring they are prepared for both the highs and lows of the market cycle.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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