Mutual funds are a pretty popular choice for investors who are looking to grow their money using professional investment expertise. They offer a way to get into a whole range of different investments, like shares, bonds and other financial products. But, unfortunately, they don’t come with any guarantees – they don’t promise you’ll make a profit!
The question, Can Mutual Funds Give Negative Returns, is therefore important to understand before investing.
So, can mutual funds really give you a loss? Yes they can. Mutual fund investments can go down in value when the underlying stocks or bonds do poorly or when market conditions just aren’t good. The amount of the loss depends a bit on the fund’s investment strategy, the mix of stocks it holds, and how much risk it’s taking on overall.
Understanding why this happens is actually pretty useful for investors – it can help them make more informed decisions and not get spooked when the market gets a bit bumpy.
Can Mutual Funds Give You Negative Returns?
Yes, mutual funds can definitely generate negative returns over both the short and long term. The value of the fund – its Net Asset Value, or NAV – gets adjusted according to the market value of the stocks it holds in its portfolio.
If you put in ₹10,000 into a mutual fund and its value then fell by 10%, you’d be left with ₹9,000. That’s a loss of ₹1,000 – excluding any charges or taxes, of course.
Mutual fund losses can happen in lots of different places. Equity funds, for example, might fall if stock prices start going down. Debt funds might lose value because of changes in interest rates or defaults on loans, or because they’re having trouble selling their holdings. Hybrid funds might experience losses from the value of both their shares and their bonds.
The Association of Mutual Funds in India (AMFI) actually says that mutual fund schemes aren’t guaranteed-return investments – their values can go up or down depending on the market and how the underlying investments do.
Why Do Mutual Funds Give Negative Returns?
There are a whole bunch of factors that can cause a mutual fund to go down in value. And if you can understand these factors, you can get a better handle on the risks before you invest.
1. Stock Market Volatility – the ups and downs of the market
Equity mutual funds are all about investing in shares. So their performance is directly linked to how well the market is doing.
When the market drops because of worries about the economy, geopolitical events or weak company profits, the value of the shares in the fund can drop too. This can reduce the value of the fund as a whole and give you a negative return.
For example, say a fund has put a lot of its money into shares of banks. If the market thinks the banking sector is in trouble, the value of those shares will probably fall.
2. Interest Rate Changes
Interest-rate changes can really knock debt mutual funds for a loop. When interest rates go up, bonds that used to look pretty good may suddenly lose their appeal. Their value might even plummet, and that’s bad news for funds that hold onto them.
The impact varies depending on what kind of bonds are in the fund, when they’re set to expire and the fund-manager’s overall strategy. Funds that are super sensitive to changes in interest rates will probably see bigger price swings.
3. Credit Risk
Debt mutual funds often invest in securities issued by other companies and lenders. But if the borrower is having financial troubles or just can’t make payments on time, it can be a real problem for the fund. This is what’s known as credit risk. And funds that have invested in shakier borrowers will be in a tougher spot than those that play it safer.
If you’re investing in a debt fund, its a good idea to have a close look at the holdings and get a handle on the risks involved.
4. What Happens When The Underlying Investments Go South
A mutual fund’s performance is only as good as the investments it owns. And if those investments aren’t doing well, the fund probably won’t either. Let’s say you’ve got a tech-sector fund and all of a sudden tech companies are struggling – your fund will likely struggle right along with them.
Even if you spread your investments out across different sectors, there’s still no guarantee you’ll avoid every potential risk.
5. What Economic And Political Uncertainty Means For Your Mutual Fund
We all know that economic slowdowns , policy changes, inflation and global conflicts can really rattle the markets. They can affect investor confidence, business performance and the prices of assets. And if your mutual fund has invested in any of those affected securities, it may experience some pretty rough times ahead.
6. Watching Out For Investment Costs
Mutual funds have all sorts of expenses that come with managing the fund and keeping it running. Those costs get added right to the funds net asset value. Even if your investments are generating some decent returns, those costs can cut into your bottom line. And if the portfolio is performing poorly, the costs can just make things even worse.
Which Mutual Funds Can Give Negative Returns?
Different mutual fund categories have different risk profiles. However, no market-linked category is entirely free from the possibility of losses.
| Mutual fund category | Why negative returns may occur |
|---|---|
| Equity funds | Falling share prices and weak corporate earnings |
| Small-cap and mid-cap funds | Greater price volatility and market uncertainty |
| Debt funds | Interest-rate changes, credit defaults and liquidity risks |
| Hybrid funds | Declines in equity or debt investments |
| Sectoral and thematic funds | Poor performance in a specific industry or investment theme |
| Index funds | Declines in the benchmark index being tracked |
The possibility and extent of losses depend on the scheme’s investments and market conditions. Investors should read the scheme information document and review the riskometer before investing.
What Should You Do When Mutual Funds Give Negative Returns?
Seeing your investment value take a tumble can be a real source of worry. But selling off immediately usually isn’t the right move. Before making any changes to your portfolio take a step back and think about the following steps.
1. Get Your Investment Goals Back Into Focus
Take a look at what you were thinking when you invested in the fund in the first place. Was it for some short term expense, a big home purchase or something more long term like retirement?
Your investment horizon really matters. If you’ve got a long time before you need the cash, short term declines might not be the end of the world, even if there’s no guarantee things will turn around. But if you need that cash sooner rather than later, you need to ask yourself whether the fund is still a good fit for you.
2. Take a Look At How The Fund Has Been Performing
Compare the performance of the fund to its benchmark and how it stacks up against other funds in the same category over a decent time period.
One time a fund is underperforming might have one explanation, and another time it might be something different. You also want to take a look at the fund’s portfolio, investment strategy, the people in charge, and just how much you’re paying in fees. Don’t make a decision based on just the latest numbers.
3. Don’t Panic Sell
Market volatility can be pretty tempting to get out at the wrong time – when prices are low. But selling can turn a paper loss into a real one. Before you pull your units, think about your goals, your time horizon and just why the fund is underperforming. If the fund just doesnt suit your needs any more, maybe its time to think about something different.
4. Don’t Overstay Your Welcome with a Systematic Investment Plan
A Systematic Investment Plan lets you invest a set amount of cash at regular intervals – its a great way to get in the game even when prices are low, and your money can buy more units. But just because you keep chugging along with your regular investments doesn’t mean the market is going to suddenly turn around in your favour. Before you invest another dollar, do a reality check on the fund and your personal finances.
5. Spread the Risk Around with Diversified Investments
Investing in a few different asset classes and market segments is a smart way to mitigate risk. There’s no one-size-fits-all answer, so you’ll need to think about combining some equity and debt investments based on your goals and what your risk level is. The right mix will depend on your individual circumstances, and that can take some figuring out.
Diversifying can help you manage risk, but it won’t erase all your losses – unfortunately.
6. Take A Close Look At Your Portfolio Every Now and Then
Rather than reacting to every little market movement, take a close look at your investments on a regular basis. Ask yourself if your portfolio still aligns with your goals and risk tolerance. If you’re not sure what to do next, maybe its a good idea to grab some advice from a qualified financial adviser – they can help you make sense of things.
Read Also: Top Reasons Why Mutual Funds Are Going Down
How to Reduce the Risk of Negative Mutual Fund Returns
Investors can’t eradicate market risk, but they can take steps to manage it.
- Know Your Limits: Select plans according to your capacity to absorb losses.
- Make a realistic time horizon for investment: It is best to refrain from engaging in the equity market with funds that must be available shortly.
- Due Diligence Prior to Investment: Look into the investment goal, the portfolio, the fees involved and the risks prior to putting in your funds.
- Diversification is Key: Refrain from placing all your eggs in one basket – diversify your portfolio among different sectors and asset classes.
- Have an Emergency Fund: Ensure that you keep some extra money for unforeseen purposes – preferably separate from your investments in the market.
- Review the Performance Periodically: Evaluate your investments on the basis of appropriate benchmarks and changes since your last evaluation.
Buying Mutual Funds on Pocketful: A Step-by-Step Guide
If you’re thinking about putting some money into mutual funds, Pocketful is a great place to start – they’ve got a load of schemes to browse through and ways to invest big or small.
Here’s how to get started:
- Head over to Pocketful: Just pop over to the Pocketful Mutual Funds page – it’s where the magic happens.
- Get an account: Follow the usual routine to get yourself set up with a new account – it’s pretty straightforward.
- Get your KYC sorted: Fill in all the Know Your Customer details and get verified – this is a one-time thing, and you won’t have to do it again.
- Start looking around: Take a gander at all the different schemes – what are their goals, what kind of risk are they carrying, what’s in the portfolio, how much does it cost, and how long is this for?
- Time to pick a plan: Will you be investing a bit every month or all at once? Either way, make sure it fits with your overall cash plan.
- Get familiar with the details: Read the scheme information documents – and don’t just gloss over it, take a good, hard look – because this is your money we’re talking about.
- Get invested: Follow the instructions on the site and keep an eye on how your investments are doing.
You can also use the tools on the site to help you compare the different funds – these will give you some ideas, but don’t be fooled into thinking they’ll magic up a winning strategy.
And yes – before we go, be aware that using these comparison tools is a big help, but at the end of the day they won’t magically solve every problem – only you can do that.
Conclusion
Mutual Funds can give you a losing return because their value depends on the performance of what they’re invested in, and the state of the markets. Markets can be volatile, interest rates can go up and down, and there’s always a risk that someone won’t be able to pay back their loan. Economic uncertainty can all contribute to you losing money.
The main thing is to get a good handle on the risks involved before you put in your money, and make choices based on your own goals, how long you can leave your money locked up, and how much risk you’re willing to take on. Try not to make decisions based on short-term market movements, and review your portfolio from time to time.
If you’re looking for a Mutual Fund, you can take a look at options through Pocketful and compare them before you invest. Just remember, all investments carry risk, and no Mutual Fund can promise you a profit.
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Frequently Asked Questions (FAQs)
Can Mutual Funds Give You a Losing Return?
Yes, they can. Mutual Funds can lose money when the things they invest in start to decline in value. Just how much you lose depends on what kind of fund you’re in, what’s in your portfolio, and what the markets are doing.
Can You Lose Your Whole Investment in a Mutual Fund?
It’s not impossible to lose a big chunk of your money in a mutual fund. How likely that is depends on which scheme you’re in. Don’t assume your money is automatically safe – take some time to understand the risks of a scheme before you put your money in.
Will Mutual Funds Ever Recover from a Market Crash?
Some of them might, if the things they’re invested in do well again. But don’t count on it happening – the outcome depends on what’s in the portfolio and how the market performs from then on.
Should You Stop Putting Money into a Mutual Fund When the Returns Get Bad?
Not necessarily. Take a step back and think about your goals, how long you can afford to keep your money locked up, and whether the scheme you’re in is still suitable for you. A Systematic Investment Plan (SIP) isn’t a guarantee that you’ll get a profit, or that you won’t lose money.
Which Mutual Funds are the Least Likely to Lose You Money?
The risk of a scheme varies depending on which one you choose. Some debt funds might be less volatile than equity funds, but they still come with risks – like the chance that a borrower won’t pay back their loan, or that interest rates will go up. Try to pick a scheme that matches your needs rather than relying on a label like “low-risk”.
