Are Zombie investments killing your wealth? Expert explains how to spot dead weight stocks and MFs in your portfolio

A portfolio review may reveal stocks and mutual funds that have been underperforming for years and no longer play a meaningful role in your investment strategy.

Holding on to such investments simply because they have been part of your portfolio for a long time could mean missing an opportunity to put that money to better use.

Such investments are often referred to as ‘zombie investments’. Here’s how investors can identify them and assess whether they still deserve a place in their portfolios.

Arjun Guha Thakurta, Executive Director, Anand Rathi Wealth, explained that an investment is considered a “zombie investment” when it continues to sit in the portfolio even though the original reason for holding it may no longer be valid.

He said that in stocks, it is important to look at the sector the company operates in, along with its earnings, cash flows, and business outlook, to assess whether its performance has weakened over several years.

“A mutual fund should not be called a zombie just because it has seen short-term underperformance. Investors should check whether the fund continues to underperform its benchmark and category average over 3-5 years,” he added.

Thakurta noted that “investors would need to do a complete assessment to understand if a stock still fits in their portfolio”.

"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,” he noted.

Thakurta explained that there is no single metric to determine whether a fund is a “zombie” investment or whether it is time to exit. Short-term underperformance does not necessarily signal a problem, as markets, sectors, and investment styles can go through cycles of underperformance before recovering.

“Hence, decisions to exit a mutual fund should be based on changes in the fund, sustained long-term underperformance, or its role in your portfolio,” he said.

“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,” Thakurta explained.

He also mentioned that what qualifies as a zombie investment can vary from one investor to another, as each investor has a different time horizon, financial objective, and risk profile.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

Sheetal Goel is a Content Producer at Livemint, where she covers corporate developments, personal finance, business trends, markets, and SEBI-related updates. She focuses on simplifying complex financial concepts and presenting them in a clear, reader-friendly manner, thereby helping audiences better understand investment trends, personal finance, and market developments.