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 have never suffered losses. However, warning signs and early indications may help here.
Sometimes a lack of planning too could jeopardise your invesments. Financial planner Gaurav Mushruwalla says, “An investment can turn bad in two ways. One, when the choice of a product goes wrong due to which it underperforms, and two, when an investor has to abruptly sell investments at a distressed value due to lack of investment planning.”
Hence, as a start, always, plan your investments.
At times, even the best of planned strategies can go for a toss. Some telltale signs of an investment that is going nowhere is when it's not making the returns that it should against its benchmark or among 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 a long time, as much as three or four quarters, it's time to re-jig your investment.
Dhirendra Kumar, CEO at ValueResearch, 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.”
Adds Mashruwalla, "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.” 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 ULIP holders, exit might not be easy. But if you have invested in a equity ULIP that is underperforming, ensure you switch plans over to debt to cut losses, if any. Exiting out of a ULIP might prove expensive and may not make sense due to surrender charges, which are 4-5% of the fund value. Preferably exit the policy after five years, as it then doesn't attract any surrender charge.Pawan Verma, chief operating officer 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 do 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.