Things investors should keep in mind when mutual funds are giving negative returns

Authored by Divam Sharma

We all hear about the famous quote “Mutual Fund investments are subject to market risks”.

When the markets fell in March 2020, most of the equity category mutual fund schemes turned negative on a 1-3 year returns perspective. We also saw red in many debt Mutual Fund schemes (i.e. credit funds) due to uncertainties in the collection from the underlying security issuers. Over the last 7 years and with the “Mutual Fund Sahi Hai” campaign, the industry had seen huge flows of investments through, particularly retail participation. Today, there are over 3000 Mutual Fund schemes in more than 45 categories, and from over 45 AMC’s.

The offerings range from Debt to Equity to Hybrid, to Commodities, to Thematic, to Goal-based categories, etc. Not all Mutual Fund categories perform the same in Bull, Bear, and Neutral market phases like all market-related investments, historical performance track in Mutual Fund schemes does not guarantee future returns. A winner today might not be a winner tomorrow.

Mutual Fund schemes of the same category, but from different Asset Management Companies (AMC’s) have a huge variance in returns generated. Sometimes the difference is as high as 10 pc returns per annum. It is important to earn good returns from your investments but it is also equally important to not lose your capital.

1. Am I in the right Mutual Fund scheme (look at the scheme objective, historical performance, portfolio of investments, market scenario, etc.)?

2. Does it meet my investment goals (look at your risk-return profile and financial plans)?

If the answer to the above 2 questions is Yes; Don’t Sell in Panic- Loss is notional till you book it. If you have an investment horizon by your side and your investment is in good schemes, your NAV will come back and give you good returns in the coming years.

The markets may become too optimistic or too pessimistic in various timelines but you should be disciplined in your approach and not be swayed by the short-term events. If your investments are good, they will make money for you on a mid-long term horizon.

A good investor invests in bad times and reaps the benefits from his investments in good times. General things that investors should take care of when their Mutual Funds are giving negative returns:

• Always remember your investment goals. Your investments should not fluctuate with short term market or NAV volatility. Markets enter uptrend and downtrend cycles every few years.

• If your investments are good, and you have an investment horizon by your side, you can increase your SIP flows in a falling market to average your investments.

• You should consider having a stop loss for your Mutual Fund investments. The NAV falling below your thresholds should trigger you to re-consider the investments.

• It is well said that when any investment falls over 20pc, it turns into a bear phase. In such a scenario, a smaller investment horizon investor should exit the investments and wait for the markets to settle and then re-enter with a fresh list of mutual fund schemes matching his criteria.

• Keep tracking the portfolio of Mutual Funds. Some mutual funds which held Yes Bank, Manpasand Beverages, DHFL, Jet Airways in equity funds faced huge NAV erosion as the companies faced challenges to stay afloat. Mutual Fund schemes with higher exposure to weak stocks should be exited.

• Investors should continuously compare performance with other funds from the same category and from different categories.

• Investors should keep on reviewing your investments with market cycles and economic trends. For e.g. in a market where companies are defaulting on repayment, credit risk funds will not do well.

• Investors should rebalance their Mutual Funds basis your investment goals, market cycles, scheme portfolio, and historical performance every 6 months. One can also reach out to a SEBI Registered Investment Advisor for your portfolio health check-up.

• Investors should always ensure that their mutual fund portfolio is well diversified to reduce portfolio risks

Some Mutual Fund schemes like tax saving ELSS have a lock-in period of 3 years. Such schemes usually underperform in terms of returns. Investors can consider exiting the investments post-lock-in period and switch to better categories and mutual fund schemes basis his investment goals.

In a Bull Phase, the Mutual Fund returns will be higher in say Midcap and Small-cap Mutual Fund schemes. In a phase of falling interest rates and an uncertain economic environment, returns from Gilt Mutual Fund schemes will be the highest in Debt categories. In a phase of a pandemic and with opportunities of expansion in demand for health and the medical sector, Pharma sector Mutual Fund schemes will perform well.

So the crux is that we need to look at the market scenario before selecting which category of Mutual Funds to invest. Remember, the reasons contributing to good returns of Mutual Funds is the liquidity of investments in your asset class, the performance of underlying securities held by the Mutual Fund, and expense ratios.