My mutual fund schemes are not doing well. Should I continue or switch to other MFs?

I am 45 and have been investing Rs 7,000 in HDFC Midcap Opportunities Fund through SIPs for the past 3 years and Rs 9,000 in HDFC Hybrid Equity Fund for 2 years. However, the returns have been poor so far. Should I continue investing in these funds or switch?
Rahul Parikh, CEO, Bajaj Capital replies: Mid and small cap benchmark indices have fallen due to correction in valuation. You can shift your existing mid-cap SIP investment of Rs 7,000 to Kotak Emerging Equity Fund and Axis Mid Cap Fund in equal proportion. Prune your investment in HDFC Hybrid Equity Fund to Rs 5,000 per month and invest Rs 4,000 in Mirae Asset Hybrid Equity Fund.

I want to invest Rs 3 lakh per quarter to build an emergency fund and save for my children aged 4 and 2. We are covered by a family floater plan of Rs 5 lakh apart from group cover provided by employers of both spouses. We are paying a home loan EMI of around Rs 1 lakh per month. Should we build an investment cushion first or prepay our home loan? Where should I invest my money?
Jayant R. Pai CFP and Head - Products, PPFAS Mutual Fund replies: As you are accumulating an emergency corpus, you need to avoid equities as you may require the money at short notice. Divide the money between bank FDs (40%) and liquid funds (60%). You should prioritise both safety and liquidity. You could diversify your investments to some extent by dividing your FDs over three top-tier banks and over three or four liquid funds.

Assess the quality of the portfolio of the liquid funds before investing. Take the help of a financial adviser if you are unable to do so on your own. As for the second question, I personally prefer the prepayment option, as any reduction in debt is always welcome.