You may want to sell a mutual fund and buy a better fund. If you own a large-cap growth fund, a small-cap value fund, or any other type of fund that consistently has lagged its peers, you might want to sell it and put your money into another fund that has topped its category, year after year.
However, you shouldn’t sell a fund just because it lags its peers for a quarter or two. If a fund’s underperformance continues for a year, you should understand why results have been poor.
In fact, there may be a reasonable explanation. The manager’s report might say the fund has been buying stocks in a certain market sector, which is currently out of favor. If you think the manager is on the right track, and the fund is just early in anticipating that sector as a market leader, you can stick around. After a couple of years as a laggard, though, you look for a different fund.
Insight: Value funds may require more patience because they try to buy stocks cheaply and hold on until prices rise.