Key Facts
- SEBI’s mutual fund categorisation and rationalisation circular groups equity schemes by market-cap band — Large Cap (top 100 companies), Mid Cap (101–250), Small Cap (251 onward) — so a fund should only be judged against its own category peers.
- SEBI’s new expense ratio framework takes effect on 1 April 2026. It splits the Total Expense Ratio into a Base Expense Ratio (AMC-controlled costs) and separately disclosed statutory levies, so cost comparisons become more transparent.
- Rolling returns calculate the return for every possible start date in a period. They give a far more reliable read on consistency than a single point-to-point return.
- Every scheme carries a SEBI-mandated risk-o-meter and must disclose its benchmark index, both listed on the fund’s factsheet.
Most SIP investors only open their portfolio statement once a year, at tax time or during a market correction. So this is exactly when an underperforming fund does the most damage — quietly, for years, before anyone notices.
This guide gives you a simple, repeatable way to check this. It helps you tell genuine underperformance apart from one rough patch that most good funds go through. It is written for investors who already run SIPs and want a sharper framework, not a reason to panic-sell.
Good Fund vs. Warning Signs: A Quick Comparison
| Signal | Likely fine | Worth investigating |
|---|---|---|
| 1-year return vs. category | Below average in a rough year | Below average for 3+ consecutive years |
| 3-year rolling returns | Close to or above category average most windows | Below category average in most rolling windows |
| Benchmark comparison | Tracks or beats benchmark over 3–5 years | Trails benchmark consistently over 3–5 years |
| Expense ratio trend | Stable or falling as AUM grows | Rising while returns fall behind peers |
| Fund strategy/manager | Unchanged, consistent style | Recent manager exit or mandate drift |
Deepak Gokul, CWM®, NISM-Series-XVII: Retirement Adviser Certified, has spent 19+ years helping Indian families review and rebalance their mutual fund portfolios. His firm, Deepak Wealth Framework Pvt Ltd, is AMFI Registered as a Mutual Fund Distributor. It deals exclusively in Regular Plans, which include ongoing review support.
What Does “Underperformance” Actually Mean?
A fund is not underperforming just because it made less money than a friend’s fund. It is underperforming when it consistently trails two yardsticks: its own benchmark index, and the average return of similar funds in its category.
Context matters too. Compare a large-cap fund only with other large-cap funds and a large-cap index. Never compare it with a small-cap fund, since that carries very different risk. SEBI’s categorisation rules exist precisely so this comparison stays fair.
Check Rolling Returns, Not Just Point-to-Point Returns
Point-to-point returns (say, “returns over the last 3 years”) depend heavily on the exact start date you pick. A fund can look brilliant or terrible depending on whether your 3-year window happened to start right before a rally or a crash.
Rolling returns fix this. They calculate the return for every possible 3-year (or 5-year) period within a longer stretch. This shows you the full spread, not one snapshot. A fund that beats its category average in most rolling windows is showing genuine consistency. A fund that beats it occasionally, by luck of the window, is not.
Most fund-tracking platforms (Value Research, Morningstar, AMFI’s own data) let you view rolling returns for free. Check this before assuming a bad year means a bad fund.
Compare Against the Right Benchmark and Category Average
Every scheme’s factsheet names its official benchmark index. This is the first number to check — not a random index you like better. Has your fund trailed its stated benchmark across most 3-year rolling windows over the last 5 years? If so, that is a real signal.
Next, check the category average. A fund can beat its benchmark yet still lag most of its peers. That gap suggests the category itself was easier to beat than the manager’s skill implies. Both comparisons matter; neither alone tells the full story.
A Worked Example: Reading a Rolling-Return Table
Here is an illustrative example (not real scheme data) showing how a pattern of underperformance actually looks across overlapping 3-year windows:
| 3-year window | Fund CAGR | Category average | Benchmark |
|---|---|---|---|
| 2019–2022 | 11.2% | 13.5% | 12.8% |
| 2020–2023 | 10.8% | 13.1% | 12.5% |
| 2021–2024 | 9.9% | 12.9% | 12.2% |
| 2022–2025 | 9.4% | 12.6% | 11.9% |
Illustrative figures only. Always verify real scheme numbers from the fund’s official factsheet or AMFI before comparing.
Notice the pattern: this fund trails both its benchmark and category average in every single window. The gap is widening, not narrowing. That is a consistency problem, not a one-year blip. A single weak window in an otherwise strong table would not carry the same weight.
Other Red Flags Beyond Returns
Returns are the headline, but a few other signals often show up before performance does.
Rising expense ratio without rising performance. SEBI’s revised expense framework takes effect on 1 April 2026. It requires funds to separately disclose the Base Expense Ratio (the AMC’s own cost) from statutory levies like GST and STT. Track this over time on the factsheet — a rising BER paired with falling relative returns is a warning sign.
Frequent manager or mandate changes. A single manager change is not automatically a red flag. But watch for repeated changes, or a shift in the fund’s actual holdings away from its stated category. Both deserve a closer look.
Unusual AUM growth. A small-cap or mid-cap fund can grow very large, very fast. When it does, it can struggle to deploy money in the same high-conviction stocks that built its earlier track record.
When Should You Actually Act?
Do not exit after one bad year. Instead, run this three-part check. Has the fund trailed its benchmark and category average across most 3-year rolling windows for the last 3–5 years? Has the expense ratio risen while relative performance fell? Has anything changed in the fund’s mandate, category fit, or management that explains the pattern?
If most answers are yes, get a structured review before you switch. Plan any exit around your specific tax and goal timeline, not just the headline return.
Frequently Asked Questions
Is one bad year enough reason to exit a mutual fund?
No. A single weak year, even a sharp one, is common for well-run funds during market cycles. Look for underperformance versus the benchmark and category average across multiple rolling 3-year windows. Treat it as a genuine problem only then, not after one calendar year.
How many years of underperformance should I wait before acting?
Most experienced reviewers look for a consistent pattern across 3–5 years of rolling returns, not a fixed number of years. If a fund trails its category average in most rolling windows, and the gap is not narrowing, it is time for a structured review.
What is a rolling return, and why does it matter more than a point-to-point return?
A rolling return recalculates the return for every possible start date within a period, instead of one fixed start and end date. This removes the luck of picking a specific window. It shows how consistently a fund has performed across many market conditions.
Should I compare my fund to its benchmark or to its category average?
Check both. The benchmark tells you if the fund manager added value over a passive index. The category average tells you how the fund did against similar actively managed peers. A fund that fails both comparisons consistently deserves closer attention.
Does a high expense ratio always mean a fund is underperforming?
Not by itself. A higher expense ratio becomes a concern only when it rises over time while the fund’s relative returns fall behind. Please verify the current expense ratio from the fund’s latest factsheet before comparing schemes.
My fund manager just changed. Should I exit immediately?
Not immediately. Give it time and watch performance against the benchmark and category average over the following few quarters. Exit only if the fund’s strategy visibly drifts from its stated category, or if underperformance becomes consistent afterward.
Where can I check my fund’s rolling returns and benchmark data?
The scheme’s official factsheet, published monthly by the fund house, lists its benchmark index and expense ratio. Independent platforms such as Value Research, Morningstar, and AMFI’s own data section also publish rolling-return tools for free.
Not sure if a fund in your portfolio fits this pattern? Get a structured portfolio review before you decide to switch. Talk to Deepak Wealth Framework →
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This content is for illustrative and educational purposes only. We deal in Regular Plans.