There are different ways of looking at the performance of an equity oriented mutual fund and the main point for the investors is that they should monitor their investments but not too frequently. The reason why a specific time element needs to be fixed for the monitoring and taking action is that there could be some short term movements that seem to amplify the actual situation and if this is the case then a wrong decision can be made based on this action. This can happen with mid cap fund more frequently and hence there is an extra element of caution that needs to be kept when this is actually the case. Here is a close look at the entire issue and how it should be handled.
Short term volatility
There is likely to be volatility in the short term in several funds depending upon the market conditions that would be witnessed. An example could be a sharp fall in the equity markets or even a sharp rally. This is likely to see a big movement in the equity oriented funds and especially if there is a certain segment of the market that is actually dictating the overall movements. So if there is a sharp correction when it comes to mid cap stocks then the mid cap fund in the portfolio of an investor will suddenly start showing a poor performance. It is likely that in some cases this also leads to a dip in performance as compared to the benchmark. In the short term it is not possible to always remain above the benchmark and hence there could be short time periods when there is deterioration witnessed here. If this is the case then suddenly the situation on the performance front does not look so good. This is the time when the investor should be extra careful on relying on the information for their decision making.
Long term performance
One of the best ways to look at the overall performance is to look at the three and the five year performance. While the latest performance is going to be included in the figures the manner in which this is impacted would be crucial. If there is a strong performing fund then a short term dip will not do much in terms of altering the overall long term trend for the fund. Thus there could be a situation wherein there might be a one year underperformance slightly but the three and the five year trends remain an outperforming one. This will be a cause for comfort but if short term movements lead to a change in the long term situation too then this is not a good sign as it shows that the margin that is available for the fund is also not much and that it could lead to a problem ahead.
Action taken
Usually a few months movement should not lead to some sort of action by the investor because this might just be temporary in nature but if there is a clear situation wherein the fund is not able to outperform over the longer term then it is a different matter. This has to be done in the context of the whole situation for the fund and looking at the manner in which the situation stands is crucial. There should be a period of at least one to one and a half years given for the fund to ensure that it is able to come back on track after a slippage and if this does not happen then a change in the holdings would be essential. This is something that has to be followed so that the overall results are good at the end of the day.