Exit a fund only if risk appetite changes or tracking error widens

Experts say investors should not exit smart-beta funds due to short-term underperformance as factor strategies are cyclical and tend to recover

Several smart-beta funds have underperformed frontline indices like the Nifty 50 over the past year. Investors must avoid knee-jerk reactions to short-term underperformance. 

Cyclical underperformance 

Momentum funds faced a sharper reversal over the past year. “Exposure to cyclicals and midcaps may have amplified their losses in a volatile market,” says Chintan Haria, principal - investment strategy, ICICI Prudential Mutual Fund. 

Experts say this underperformance is cyclical. “Momentum typically faces reversals after exte­nded rallies,” says Haria.No single factor leads every year. “Momentum leads in bull markets but is vulnerable during reversals. Quality and low volatility are defensive factors that show lower