Do you redeem your funds too early?

If someone started an SIP of Rs 1,000 in the Reliance Growth Fund when it was launched in October 1995, his investment would be worth Rs 47 lakh today. But it is doubtful that an investor started so early and continued investing systematically throughout the ups and downs in the past 20 years. AMFI data shows that small investors don't  remain invested in equity funds for long. More than 53% of the investments are redeemed before two years. 

Though there is no data, there is little to suggest that even the balance that makes it beyond two years remains invested for the long term. This trend is not confined to India. A study done by Dalbar in the US found that the average return earned by an investor was only half of the average mutual fund return.

For fund houses, the big challenge is to attract long-term investors who are convinced that their money is being managed well.The only way to do this is to link long-term goals with the investments. That is what will prevent the investor from redeeming too soon. 
Hope springs from the fact that investors are gradually understanding the benefits of systematic investments. There are 78 lakh SIPs registered with mutual funds, though experts feel this is too small a number. In a country with an investing population of almost 20-30 crore, 78 lakh SIPs is not a very heartening figure. The temptation to book profits is a common mistake that fund investors make. 
While periodic booking of profits makes sense and is even advisable when you invest in stocks, equity fund investors need not follow suit. Just like their fund manager would know when to pick up stocks that are looking attractive, he would know when to offload those that are overvalued. 

Or hold on to losers for too long?

The flipside of moving out too soon is the tendency to remain invested in funds even though they consistently underperform. In the table below, we have looked at the five worst underperformers in the past five years. These five funds have close to Rs 690 crore of investor money, which has grown at an average annual rate of 4.5% in the past five years.

Thankfully, some investors have noticed the underperformance and punished it. The SBI Magnum Comma has seen its corpus dwindle from Rs 653 crore in December 2009 to Rs 224 crore now, a fall of 66%. Sundaram Select Focus, another chronic underperformer, has seen its AUM fall by almost 70%. Still, about Rs 7,000 crore lies in the 25 worst performing funds. This money has grown slower than the Nifty in the past five years. Why aren't investors dumping these laggards? "The advice in the market is often not in the interest of the investor. An adviser will get the investor to put in money but rarely ask him to take it out.
Ideally, one should monitor the performance of funds once in a quarter and review the portfolio once in a year. If a fund consistently underperforms for 3-4 quarters, it may be time to replace it with a better scheme.