Mutual funds offer many benefits to investors. They help diversify your portfolio, give you the advantage of professional fund management and even offer tax benefits. However, on the flip side, there is one key limitation — the returns from mutual funds are not guaranteed. So, it is natural to be worried about mutual fund losses.
If you are on the fence about MF investment, you may be wondering if you can lose money in mutual funds. Let us find out the answer to this question and see what to do if it is a possibility.
Can you lose money in mutual funds?
The short answer? Yes. It is possible to lose money in mutual funds depending on how the values of the assets in the fund’s portfolio move. The value of a mutual fund is generally expressed in terms of the Net Asset Value (NAV) of its units. The formula for the NAV per unit is simple, as shown below:
Net Asset Value (NAV) per unit = (Fund’s Assets — Fund’s Liabilities) ÷ Total Number of Outstanding Units
For example, say a fund’s total assets amount to Rs. 50 lakhs and its liabilities amount to Rs. 5 lakhs. If the fund has 1 lakh units outstanding, the NAV per unit will be Rs. 45 (i.e. Rs. 50 lakhs minus Rs. 5 lakhs, divided by 1 lakh units).
Now, say you invest Rs. 90,000 in the fund. Since the NAV of the fund is Rs. 45 per unit, you can purchase 2,000 units. After a year, if the NAV of the fund drops to Rs. 35 per unit, your holdings will only be worth Rs. 70,000. This essentially means you have lost Rs. 20,000 in the mutual fund.
Why does mutual fund loss happen?
1. Market dependence
Mutual funds are influenced by market fluctuations, emphasising the importance of wise and cautious investment strategies.
2. Lack of knowledge
Inadequate understanding of investment options and market dynamics can contribute to mutual fund losses.
3. Unreliable fund managers
Poor performance by fund managers can negatively impact mutual fund returns.
4. Unrealistic expectations
Setting unrealistic profit goals for short-term investments can lead to impulsive decisions and potential losses.
Is mutual funds safe?
The risk profile of a mutual fund is directly influenced by the underlying assets and prevailing market conditions. For instance, funds primarily invested in government bonds typically exhibit lower risk compared to those focused on equities. However, even traditionally conservative investments can experience value fluctuations due to factors such as rising interest rates or economic downturns.
It's essential to remember that mutual funds are not insured or guaranteed by any governmental or regulatory body. Consequently, there remains a potential for capital loss, even in seemingly secure investments.
What to do if you are losing money in mutual funds?
Losses and underperformance are common in the markets. However, many investors are not aware of how to react and what steps to take next. If you too are not sure what to do in case you suffer mutual fund losses, here are some tips that can help.
- Avoid panic selling: Panic or fear is the first emotion you may feel when you discover that you are losing money in mutual funds. This emotion may prompt you to exit the fund immediately before the losses increase. However, such panic-driven selling is rarely a smart move. So, ensure that you remain calm and perform the various assessments required.
- Look into the reason for the loss: The first thing you need to assess is the reason for the loss. Is your mutual fund performing badly because the overall market is in a bearish phase? In that case, your mutual fund losses may be due to the broad market forces. Such downturns are common in the market and usually correct or reverse with time.
- Capitalise on the downtrend: If the downtrend is a broad-market phenomenon, you can capitalise on the falling prices while you wait for them to reverse upward. This is possible if you have chosen SIP investments instead of a lump sum investment because you can accumulate more fund units in a falling market, thereby increasing your investments.
- Compare fund performance: You also need to better understand if the mutual fund losses are generic or specific to the scheme you have invested in. To do this, you can compare the fund performance with that of other schemes in the same category. If other similar funds are performing well, your specific scheme may be poorly managed, leading to losses.
- Take corrective action if needed: In case you are losing money in mutual funds because of fund-specific factors, it may be time to take corrective action. If a fund has been consistently underperforming for 2 to 3 years or more, it may be time to redirect your capital to other better-performing schemes in the same category.
- Diversify your investments: If no corrective action is required, you can diversify your portfolio and include other upward-trending assets in your basket of investments. This will help offset some of the mutual fund losses while you wait for the market to correct and the prices to rise once more.
Smart strategies to avoid losses
Here are the rephrased statements in a more formal and professional tone:
- Maintain market awareness: Stay current with market trends and fund performance to make informed investment decisions.
- Begin with conservative investments: Consider starting with safer options such as hybrid or debt funds to minimise risk.
- Exercise emotional discipline: Avoid impulsive actions during market fluctuations by maintaining a calm and rational approach.
- Optimize redemption timing: To maximise returns, redeem funds after a year to avoid exit loads that can reduce overall gains.
- Learn from investment experiences: Analyse past investment decisions to identify areas for improvement and enhance future strategies.
- Assess relative performance: Evaluate a fund's performance within its specific category to make informed comparisons and identify top performers.
- Implement portfolio diversification: Spread your investments across various schemes, sectors, and categories to mitigate risk and enhance potential returns.
- Adopt a long-term outlook: Recognise the cyclical nature of the market and maintain a long-term investment horizon to benefit from potential growth.
Conclusion
This concludes our guide on what to do if you are losing money in mutual funds. You can follow all these practices or handpick the ones that work best for your specific investment journey. However, the important thing to remember is that downturns are a part of the market cycle. So, it is crucial to ensure you do not succumb to negative biases stemming from fear or panic.
If you are looking for mutual fund schemes that can help you meet your various short-term and long-term goals, the Bajaj Finserv Mutual Funds Platform is the place to be. Check out the 1,000+ fund options available on our platform, compare the mutual funds of your choice and identify the ideal scheme for your goals.
