Holding on to perpetual losers

A lot of investors tend to hang on to poorly performing investments for far too long

Investment advisors' commonest lament is that investors are not patient with their investment. Investors buy and sell too often, and have an excessively short-term perspective. However, this is an impression that is primarily true of equity investors. Equity investors tend to sell their holdings for three possible reasons:

one: they've made a loss,

two: they've made a profit, and

three: they've made neither a loss nor a profit.

However, mutual fund investors seem to be guilty, if anything, of the reverse sin. There are far too many investors who hang on to mediocre funds for long periods of time, losing large chunks of potential returns.

Does that mean that investors should be trigger-happy about getting out of their investments? Not really. It means that most of us who invest in mutual funds need to distinguish short-term declines or underperformance from long-term poor performance.

When we look at the assets being managed by equity funds, they naturally mirror the long-term performance of those funds. In general, funds that have done well have had good inflows and are thus managing a large amount of money, and vice versa. The interesting thing is that there are lot of anomalies to this. There are funds that are doing badly but have a lot of money to manage. Mostly, they are funds that have done well for extended periods of time in the past so have a set faithful investors who are hanging in. That makes sense.

However, there are many funds that have never done well, have always lagged the markets as well as their peers and yet have thousands of crores of assets. The building up of these assets can be attributed to salesmanship, but the blame for its sustenance must go to investors who are not paying attention to their money. A lot of us have investments we are ignoring but which are bleeding potential returns. Investors need to weed out non-performers from their portfolios.