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There is always the chance that your investments could turn bad, despite good market conditions. If an investor knew how to identify bad investments, he would never have suffered losses. So, warning signs and early indications could help here.
Sometimes lack of planning too, could jeopardise your investments. Financial planner Gaurav Mashruwala says, "An investment can turn bad in two ways. One, when the choice of a product goes wrong, due to which it underperforms. Two, when an investor has to abruptly sell investments at a distressed value due to lack of investment planning." Hence, always plan your investments.
At times, even the best of planned strategies can go for a toss. Some tell-tale signs of an investment going nowhere are when it's not making the returns that it should against its benchmark or its peer set. For instance, a diversified mutual fund should at least be able to match the performance of its benchmark. If that is not happening for long, as much as three or four quarters, it's time to re-jig your investment.
Dhirendra Kumar, chief executive officer (CEO) at Value Research, says, "If the mutual fund or stock doesn't fulfil the criteria of returns and growth, which were the main reasons for the investment, then one should exit it."
"One should exit a fund or stock if it has underperformed the benchmark or has not returned as much as its peers. Excessive churning of a portfolio, high charges and a weak portfolio could further hamper the returns," adds Mashruwala. If the net-asset value/price of your fund or stock has increased but only in a limited manner, despite good market conditions you should exit, say experts.
Also, if you sense that the mutual fund scheme is deviating from its objective or investing strategy, this could be an early indicator. To be on the safe side, it's best to study the fact sheet and grasp all the fund details before you invest in a mutual fund scheme. This rule also applies regarding a fund manager. If a fund manager has moved from a particular fund or is not performing well, this could be a cause for concern.
For Unit-linked insurance plan (Ulip) holders, exit might not be easy. But if you have invested in an equity Ulip that is underperforming, ensure you switch plans to debt to cut losses, if any. Exiting a Ulip might prove expensive and may not make sense due to surrender charges, which are four to five per cent of the fund value. Preferably exit the policy after five years, as it then doesn't attract any surrender charges.
Pawan Verma, COO at Star Union Dai-chi Life Insurance, says, "The Ulip policyholder should switch between options to cut losses. For instance, s/he should increase her/his exposure to debt by switching to a debt option in the fund if equities are doing badly, and vice versa."
For direct investors, if promoters' holdings fall significantly, this could be an indicator. One should exit a stock if debt is ballooning, and there does not seem to be attempts by the company to reduce it. An investor should examine a company's quarterly numbers regularly and look for variations from plans such as unexpected losses reported, or a significant drop in margins.
Bottom line: Keep an eye out and spot such early indicators; cut your losses.
