What if one day you wake up to find that your mutual fund investment has dropped to zero? Pondering upon this question can have an adverse impact on your investment journey. But can mutual funds drop to zero overnight? While it is highly unlikely that your mutual fund investment will drop to zero, the fear of it can be quite unsettling. Moreover, different mutual funds come with different risk profiles. So let us explore how you can avoid pitfalls and maximise your returns in the long run.

• Mutual funds are highly diversified so it is nearly impossible for their value to fall to zero.
• Short term dips can happen. It is important not to panic-sell and to stay invested for the long-term.
• Spreading investments across different funds helps reduce risks and improves your chances of recovering from downturns.

It is theoretically possible to lose the entire value of an investment. For instance, if you own stock in a company that declares bankruptcy, the stock value can shrink to zero. There are known risks associated with individual stocks.

Mutual funds work a bit differently. They invest their entire corpus into a diversified array of stocks and other assets that greatly reduces risks. So it is very unlikely that a mutual fund would go down to zero. However, the returns can indeed be negative, but a person would not owe any money in such a case. There can be no negative balance with mutual funds. Besides historically, no mutual fund has ever realised a total portfolio value of zero. This would mean that each security and asset in the portfolio of the mutual fund is zero. It is practically impossible.

Mutual funds are one of the most sought-after investment vehicles in the market today. Much of it is due to its track record providing investors with generous returns in the long term. However, it may so happen that your mutual fund investment drops to 25% of its original value. This is a much more probable event than going directly down to zero. While this is also quite improbable, here are a few tips to navigate your investment should it fall to anywhere near its 25% value:

Avoid panic selling

Remember, unless you have sold your units, your losses are only nominal and on paper. Only if you sell at the low, you realise actual losses. Just like its sudden drop in value, it can also shoot up in the long run. While it is quite natural to panic, especially if you have a significant investment, it is key to avoid panic selling and stay in the game for the long run. Historically, markets have always bounced back after periods of downturns.

Review your investments

Take some time to review your investments.Re-examine the underlying fundamentals of the securities or assets held. For instance, in the case of a mid-cap equity fund, take a look at the portfolio holding to see if it can sustain the market currently. Consult an investment advisor in deciding on which investments are worth holding and which ones should be sold when the time is opportune.

Stick to investment goals

Do not change your investment goals just because of bearish market conditions. It is integral to stay invested for the long term to maximise your potential gains. For instance, equity mutual funds are generally meant for long term financial objectives with a horizon of 5-10 years. If the fundamentals of your investments remain solid, sticking to your plan is often the best strategy.

Embrace market volatility

Embrace market volatility as a natural part of investing. It is inherently impossible to predict markets, and ups and downs are very natural in any investment environment. Obviously, it is unnerving to watch values go up and down regularly, but volatility can actually open the doors for long term wealth generation and tax savings. Staying cool and focused on your long-term goals will help you navigate through ups and downs more effectively.

Diversify your portfolio

Diversification is a great way to reduce and manage your risks while investing. Instead of pooling all your capital into one mutual fund, you can include smaller investments in various mutual funds such as mid-cap equity funds, hybrid funds, sectoral funds, etc. This will help you recover any losses that may creep into your investment portfolio.

While concerns about mutual fund investments dropping to zero are understandable, they are largely unfounded due to the diversified nature of mutual funds. Although market swings are common, staying committed to your long term goals, avoiding panic selling, and diversifying your portfolio will help you navigate these challenges. Moreover, history shows that markets recover from downturns, and thoughtful planning and patience can lead to massive gains over time.

Visit the Bajaj Finserv mutual fund platform and find over 1000 mutual fund schemes to invest in. Use the Mutual Fund Calculator, compare mutual funds, and more. This is integral if you want to make the most of investing in mutual funds and other tradable assets.