Which funds should you sell now?

Investors have more than £8.6bn rotting away in 'dog' funds which have underperformed for the past three years. Now could be the time for a rethink.

Investors have more than £8.6bn rotting away in "dog" funds that have underperformed their benchmark in each of the past three years, and that have fallen short of them by 10% or more. According to a new study from IFA Best Invest, 52 funds now feature on the list, up from 38 in January. And while past performance can't be used as a guide to how these funds will do in the future, investors "need to have a good reason for holding on to them," Justin Modray of Best Invest tells The Times. "Talented managers may have had a bad run, or bad managers been replaced by better ones," he says. "But overall, there are plenty of funds that are not worth keeping."

Top of the list is the £2.2bn Prudential UK Growth. It has failed to beat the FTSE All Share Index for eight of the past ten years. Henderson came second, despite the fact that it has made 12 fund management changes in the past two years. It continues to underperform. Bestinvest hopes that the study will make people think more carefully about where they have their money invested, especially since the number of "dog" funds is on

the increase. "The increase in dogs, coupled with the low proportion of active managers beating the index over the last three years, really does highlight the importance of cherry-picking good fund managers," Bestinvest fund analyst Mark Hinton tells the Daily Mail.

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Why not try an equity income fund instead?

For those looking for a steady income, one of the best-performing equity income funds could prove to be a more rewarding choice than putting your money in a savings account. That's because inflation can strip away much of the gains from interest payments, while equity funds can provide capital gains as well as income.

For example, building society interest has dropped from 13% to 4.5% over the last 16 years, says Mark Dampier of IFA Hargreaves Landsdowne in The Daily Telegraph. On the other hand, the 12 best equity income funds posted average returns of 19.9% in the past year to last month, beating the market in each of the past five years. This is according to Principal Investment Management, which has monitored the sector for 30 years.

According to The Daily Telegraph, £10,000 invested in the average equity income fund ten years ago would now be worth £16,684. But had you reinvested the income, the equity investment would have more than doubled to £23,578 after ten years. Advisers single out Neil Woodord at Invesco Perpetual Income and High Income, Tony Nutt at Jupiter Income, George Luckraft of Axa Framlington Monthly Income and Adrian Frost at Artemis Income as top-performing fund managers in the sector. Although the value of shares can go up as well as down, the risk is worth taking when you consider how top-performing funds in the sector have beaten other income generation measures hands down.