10 Things to do when your mutual fund investment is making losses

Mutual funds are one of the most popular investment vehicles in India. These allow investors to invest in various asset classes, like equity and debt instruments, and earn returns on their money. 

However, many investors have lost money in mutual funds. This is because the performance of a mutual fund depends on the markets. Just as the market has its ups and downs, so will there be periods of good and poor performance for a fund. 

This article lists the ten things you should do if your mutual fund investments are making losses.

• Don’t panic 

The performance of mutual funds is linked to the performance of the stock markets. So, there will be days when your mutual fund portfolio or certain funds will appear in the red. You may think you are losing money, but the loss that you see on screen is notional, or just on paper. Only when you redeem your mutual fund units, would these losses become real. 

In fact, when the markets are down, don’t sell; do the opposite. Buy more units of the mutual fund. When markets do move up, you will see the value of each unit increase and give you a higher return on investments. 

It is important to note that the returns from mutual funds, in most cases, would inch higher after a downturn in the market.    

So, do not panic and sell your mutual fund investments. 

• Compare with mutual funds in the same category 

Comparison with other funds in the same category will help you understand whether the problem lies with your fund or the category in general. 

An entire category of mutual funds may perform poorly because of broader market parameters. In this aspect, your fund manager may not be able to do much to buck the trend. 

• Compare with funds across different categories

After you have compared mutual fund returns within the same category, you can also compare the performance with mutual funds across different categories.

Different categories of mutual funds give different returns, as some funds could be more volatile than others. One such example is small-cap funds which typically provide attractive returns but also carry higher risk.     

So, if you are not willing to take higher risks, you may want to shift your investments to a less volatile fund. 

• Check if it is a sectoral fund

Sectoral funds are those that invest in a specific sector, such as IT, healthcare, or banks. 

Sometimes, specific industries or sectors may suffer even when the broader markets are doing well. You might lose money in a mutual fund because it is linked to a sector that is underperforming the market at that particular time. 

Sectoral funds carry risk, and their performance is a lot harder to predict. So, if you notice your sectoral fund is underperforming, put in thorough research.  

If your research shows the sector has potential for high growth, stay invested. If you conclude the sector’s glory days are over, redeem your investments. 

• Diversify your mutual fund portfolio 

Investment options are divided into different asset classes. Equity and debt are popular investment asset classes. Investing in different asset classes helps balance a portfolio. Sticking to one asset would yield similar returns and as all the funds would react similarly to market developments. 

So, if your mutual fund portfolio is heavy on equity investments, then you can look to add debt instruments, such as liquid funds or other debt funds to it. 

Debt funds will help you balance out the volatility of the equity funds. Besides debt funds, gold funds can also help you hedge against any sharp downturn in equity markets. Typically, gold prices increase when equity markets decline.   

• Stick to your asset allocation

This will sound contrarian to the last point. However, if you have noticed an asset allocation works for you, it is probably a good bet to stay invested in the same class. 

For instance, if you invest predominantly in equity, increase your allocation when the markets take a dip. Don’t hesitate to consult a financial advisor. 

• Don’t stop your SIP 

One of the best ways to beat market volatility is by investing regularly through a Systematic Investment Plan (SIP).  

When you invest a certain sum every month through an SIP, you are allocated more units when the market is down and vice versa. So, when you see your mutual fund is in the red, it may tempt you to discontinue your SIP, but it may not be the best option for you. Instead, continuing your SIP may actually help you build wealth and fulfil your goals in the long term.        

• Focus on your goals

Equity investments are subject to short-term volatility. When you’re focused on returns, it’s easy to get carried away. Thus, focusing on long-term goals may be a better option than eyeing short-term returns. 

So, the next time the markets take a beating, don’t check your daily return; check if you are on track to achieve your financial goals within the required timeline. 

• Guard against recency bias

Recency bias is a behavioural bias where you focus more on recent events and ignore earlier ones.  

Most investment portals would give you both, short-term returns and the long-term returns of a mutual fund. If your long-term returns are reasonable and you are having second thoughts because of the near term returns, chances are you are a victim of a recency bias. 

• Talk to a financial advisor 

Investing is not easy and seeking professional help is a smart move. A financial advisor can handhold you through testing times and keep you focused on your financial goals. If you have a financial advisor, it would be a great idea to talk to them first and then rejig your investments.

Conclusion:   

Do not worry if your mutual funds are reporting losses. But, don’t invest in a mutual fund and forget it either. Some research, some professional advice and decision-making focused on long-term goals will help you grow your wealth over time.