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Mutual funds are often associated with long-term wealth creation, but that does not mean their value always moves upwards. Can mutual funds give negative returns? Yes. A mutual fund investment can lose value, particularly over shorter periods when markets or the securities held by the scheme come under pressure.
The important point is to understand why the return is negative. A temporary fall during a market correction is different from a prolonged decline caused by weak investments or a fund no longer matching the investor's goals.
Here is how investors can assess whether a temporary fall needs patience or a portfolio review.
Key Takeaways
- A negative return means the current value of the mutual fund investment is lower than the amount invested, based on the period being measured.
- Equity funds are generally more exposed to short-term losses because their NAV depends heavily on stock prices.
- Debt funds can also deliver negative returns when interest rates rise or when issuers face credit problems.
- A fall in NAV does not automatically mean that a mutual fund is a poor investment. The reason, duration, and fund's long-term performance matter.
- Investors should review the scheme's portfolio, objective, risk level, and time horizon before deciding whether to continue, switch, or redeem.
Why Can Mutual Funds Give Negative Returns?
A mutual fund invests in a portfolio of securities. The value of those securities changes with market conditions. As a result, the NAV of the scheme can also rise or fall.
For example, suppose you invest ₹20,000 in an equity mutual fund. If the NAV falls because the stocks held by the fund lose value, your investment may temporarily be worth ₹18,000. That ₹2,000 difference represents a negative return if the investment is valued at that point. Several factors can cause this.
Mutual fund returns depend on market movements, interest rates, and credit quality; costs such as the expense ratio do not create losses on their own but can add to one when markets turn.
Market Volatility
Stock markets can fall because of weak economic growth, inflation, changing interest rates, geopolitical events, or poor corporate earnings. When the market falls, equity mutual funds can also see their NAV decline. The impact can be sharper for funds investing heavily in mid-cap, small-cap, or sector-specific stocks.
Interest Rate Changes
Debt mutual funds are not completely insulated from market movements. Bond prices and interest rates generally move in opposite directions. When interest rates rise, the market value of existing bonds with lower interest rates can fall. This can affect the NAV of debt funds holding those securities.
Credit Risk
A debt fund invests in bonds and other fixed-income instruments issued by companies or institutions. If an issuer faces financial trouble or defaults on its obligations, the value of the security can fall. Credit-oriented debt funds can experience losses even when the broader stock market is doing well.
Fund Concentration
Diversification can reduce the impact of a single investment falling sharply, but some mutual funds have concentrated exposure to a particular sector, theme, or type of security. If that area performs poorly, the fund can experience a larger decline than a more diversified scheme.
Expense Ratio
A mutual fund has some operating and management costs, which are shown in its expense ratio. The expense ratio does not directly cause a loss like a market fall or a change in interest rates. But since these costs are taken from the fund’s assets even when the fund is performing poorly, they can make a loss bigger or reduce the gain you would have made.
Which Types of Mutual Funds Can Give Negative Returns?
Different categories carry different levels and types of risk. There is no mutual fund category that guarantees positive returns in every market condition.
| Mutual fund type | Why negative returns can occur | Typical sensitivity |
| Equity funds | Falling stock prices and weak earnings | High |
| Small-cap funds | Greater volatility in smaller companies | High |
| Sectoral funds | Poor performance in the selected sector | High |
| Debt funds | Rising interest rates or credit events | Varies by duration/credit quality |
| Hybrid funds | Declines in equity and debt holdings | Moderate |
| Index funds | Fall in the underlying market index | Market-linked |
The actual risk depends on the scheme's portfolio, strategy, and market environment.
Note: Within debt funds, sensitivity is not uniform and can depend on the fund's average maturity/duration and the credit quality of its holdings.
Can Debt Mutual Funds Also Give Negative Returns?
Debt funds can also produce negative returns. It is easy to assume that bonds always provide stable returns because they pay interest. However, the market value of bonds can change before maturity.
For example, suppose a debt fund holds bonds issued when market interest rates were lower.
If interest rates rise, newer bonds may offer better yields. Existing bonds can become less attractive, which can reduce their market value and, in turn, affect the fund's NAV.
If a company struggles to repay its loans, the bonds or other debt securities it has issued can lose value. A debt fund holding those securities can take a hit as a result.
So, while debt funds may generally fluctuate less than equity funds, they are not free from risk.
How do You Calculate Negative Returns on a Mutual Fund?
The calculation is fairly simple when you are looking at a one-time investment. You compare what the investment is worth today with the amount originally put in.
Formula:
Return (%) = [(Current Value − Investment Amount) ÷ Investment Amount] × 100
Take a simple example. Suppose ₹50,000 was invested in a mutual fund and the investment is now worth ₹45,000.
- Investment amount = ₹50,000
- Current value = ₹45,000
- Loss = ₹45,000 − ₹50,000 = −₹5,000
Now put these numbers into the formula:
Return = [(-₹5,000) ÷ ₹50,000] × 100
Return = −10%
So, the investment has fallen by 10% over the period being measured.
The calculation is different for an SIP. Since an SIP buys units at different NAVs on different dates, there is no single purchase price for all the units.
Simply subtracting the current value from the total amount invested can show whether there is a gain or loss, but it does not give the annualised return.
Calculations such as XIRR are generally used when returns from investments made at different points in time need to be assessed.
What Should You do When Your Mutual Fund is Showing Negative Returns?
The first reaction to seeing a loss is often to sell. That can be an expensive reaction if the fall is only temporary.
Instead, look at what is happening with the fund. If the entire market has fallen, the decline may have little to do with the fund manager's decisions.
If the scheme has been lagging behind similar funds for a long period, there could be more to investigate.
Start by finding out what caused the fall. Look at the fund's recent performance and the securities it holds. A few questions can help put the fall into perspective:
- Has the broader market also declined?
- Are other funds in the same category facing a similar fall?
- Does the scheme have heavy exposure to a particular sector?
- Has the fund's investment strategy changed?
- Has one or more securities in the portfolio fallen sharply?
This helps separate a market-wide fall from a problem that may be specific to the scheme. See how the fund compares with similar schemes. A negative return on its own does not tell you much. During a market correction, several funds in the same category may fall together.
It helps to compare the scheme with its benchmark and other funds in the same category. If the fund has fallen broadly in line with them, the result may simply reflect the market.
On the other hand, consistent underperformance over several periods deserves a closer look.
Think About When You Need the Money
The same fall can mean very different things to two investors. Someone investing for a goal that is still 10 years away may have time to wait through a market cycle.
Someone who needs the money next year has much less room for a sharp fall in value.
This is particularly relevant for equity funds, where short-term price swings can be significant. As a financial goal gets closer, the level of risk in the portfolio may need to be reconsidered.
Check Whether the Fund Still Suits Your Goal
Investment decisions should not be based only on the latest return. Go back to the reason the fund was chosen in the first place. Look at its:
- Investment objective
- Risk level
- Asset allocation
- Portfolio quality
- Long-term performance
- Investment horizon
- Suitability for the financial goal
If the fund still fits these requirements and the negative return is linked to a temporary market phase, there may be no reason to make a rushed decision.
Does a Negative Return Mean the Mutual Fund is Bad?
A fund can show a negative return without being a poor investment. Markets go through ups and downs. Equity funds, for instance, can lose value during a broad market correction even when the companies in their portfolios remain fundamentally sound.
The NAV may recover when market conditions improve. What matters is whether the fall is temporary or part of a longer pattern.
Persistent underperformance compared with the fund's benchmark or category is worth investigating.
The same applies if the portfolio has become too concentrated, the investment strategy has changed significantly, or the quality of the securities held by the fund has weakened. This is why judging a fund on one bad month, or even one bad year, can be misleading.
The investment needs to be viewed in the context of its category, portfolio, and intended holding period.
How can You Reduce the Impact of Negative Returns?
There is no way to remove market risk completely from mutual fund investments. What you can do is avoid putting all your money behind one type of risk.
Spread investments sensibly
Different asset classes do not always move in the same direction. Equity may fall while some debt investments remain relatively stable, for example.
Holding a suitable mix can reduce the effect of a fall in any one part of the portfolio. The mix should still match the investor's financial goals and ability to handle losses.
Continue investing through SIPs
An SIP does not stop a mutual fund from falling, but it changes how units are purchased. When the NAV is high, the fixed SIP amount buys fewer units. When the NAV falls, the same amount buys more units.
Over multiple instalments, this can bring down the average purchase cost when markets move through different levels. This does not guarantee a profit. The investment can still remain in negative territory, especially during a prolonged market decline.
Give the portfolio a periodic check
Checking a mutual fund every day can make normal market movements look more important than they are. At the same time, leaving an investment untouched for years without checking whether it still serves its purpose is not ideal.
A periodic review can help you see whether the fund's performance, portfolio, and risk level still fit the original goal.
Do not sell simply because the NAV has fallen
A falling NAV can be uncomfortable, but the fall itself does not tell you whether selling makes sense. Selling after every market decline can lock in losses that might otherwise have recovered.
The opposite extreme is also worth avoiding: continuing to hold a fund indefinitely despite persistent problems.
The better question is not simply, “Why is my return negative?” It is, “What is causing the negative return, and has anything fundamentally changed?”
Conclusion
Mutual funds can deliver negative returns because they are market-linked investments. Equity funds may fall with stock prices, while debt funds can be affected by interest rates and credit risks. A temporary decline does not necessarily indicate a problem. Investors should assess the fund against its benchmark and category, review its portfolio, and consider their investment horizon before deciding on the next step.
