6 days ago
How to Spot Zombie Stocks and Mutual Funds
A zombie investment is an investment that stays in your portfolio even though you may no longer have a good reason to own it.
For stocks, investors should examine the company’s sector, earnings, cash flows, debt, and business outlook.
They should also compare the company with similar businesses.
One bad quarter does not always mean a stock is permanently weak.
A mutual fund may have a difficult period because markets or investment styles move in cycles.
Investors should look for steady underperformance against the fund’s benchmark and similar funds over three to five years.
They should also check whether the fund’s strategy or holdings have changed.
A portfolio review every six months can help investors decide whether each investment still supports their goals.
Zombie investments remain in portfolios even after their original investment rationale is no longer valid.
Investors should assess a stock’s sector, earnings, revenue, cash flows, debt, and returns on invested capital.
A weak quarter or year may reflect a temporary cyclical slowdown rather than a lasting business problem.
Mutual funds should be judged against their benchmarks and category peers over three to five years, not just short-term results.
Investors should review and rebalance their portfolios every six months to check whether each holding supports their financial goals.
- Who
- Investors and Arjun Guha Thakurta, Executive Director at Anand Rathi Wealth.
- What
- Guidance on identifying and reviewing underperforming stocks and mutual funds known as “zombie investments.”
- Where
- When
- Investors are advised to review and rebalance their portfolios once every six months; mutual-fund performance should generally be assessed over three to five years.
- Why
- To determine whether investments still fit the portfolio and help investors move toward their financial goals.
Key facts
- Zombie investment
- An investment that remains in a portfolio even though the original reason for holding it may no longer be valid.
- Stock review
- Assess the sector, earnings, revenue, cash flows, debt, returns on invested capital, and business outlook.
- Stock warning signs
- Weak earnings, rising debt, and sustained pressure on cash flows can signal problems.
- Mutual-fund comparison
- Compare a fund with its benchmark and category peers.
- Long-term test
- Persistent mutual-fund underperformance should be assessed over three to five years.
- Review frequency
- Portfolio reviews and rebalancing are recommended once every six months.
Quotes
Arjun Guha Thakurta
Executive Director at Anand Rathi Wealth
“Investors should do a portfolio review and rebalancing once every 6 months. During the review, investors can go through their portfolio and understand how each fund fits and whether it is helping them get closer to their financial goals.”
livemint.com
“A cyclical slowdown can be temporary, while a company losing its competitive position can be a much bigger problem. Investors should therefore assess multiple indicators together rather than reacting to a single weak quarter or year.”
livemint.com
Sources
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