Can Mutual Funds Give Negative Returns?

5 mins read
by Angel One

Mutual funds are a collection of funds from diverse sources invested in various financial instruments such as equities and bonds. These funds often have a modest initial investment limit and a low-risk profile. Their returns are not highly aggressive due to their low-risk character. They are open to the entire public to invest in.

In a bullish market, mutual funds provide exceptional returns, but in an adverse market, they provide below-average returns.

Categories of Mutual Funds

When the markets crashed in March 2020, most equities mutual fund schemes went into negative territory during the next three years. Due to uncertainty in the collection from the underlying asset issuers, we noticed red in numerous debt Mutual Fund schemes (i.e., credit funds). The business has experienced massive flows of investments, notably retail involvement, during the previous seven years, thanks to the “Mutual Fund Sahi Hai” promotion. There are about 3000 mutual fund schemes available today, spanning 45 categories and 45 asset management companies (AMCs).

The categories include Debt, Equity, Hybrid, Commodities, Thematic, and Goal-based varieties. Like all market-related investments, not all Mutual Fund categories perform the same in Bull, Bear, and Neutral market phases. Documented performance trials in Mutual Fund schemes do not promise future results. Today’s winner could not be tomorrow’s winner.

Returns on Mutual Funds

It’s vital to have a decent return on your investments, but it’s also crucial to avoid losing money. The returns achieved by mutual fund schemes in the same category but from various Asset Management Companies (AMCs) range dramatically. The difference might be as much as 10% in annual returns.

So, what should a mutual fund investor do if their investment yields a negative return? There are two inquiries:

1. Am I in the correct Mutual Fund scheme (consider the scheme’s aim, past performance, investment portfolio, market environment, and so on)?

2. Is it in line with my investing objectives (consider your risk-reward profile and financial plans)?

If the response is yes to the above two questions, and the investment is in solid schemes with a long time horizon, the NAV will rise and provide you with high returns in the following years.

The markets may become too enthusiastic or gloomy in various timelines, but you should remain disciplined in your approach and not be persuaded by short-term happenings. From a mid-to-long-term perspective, if your investments are solid, they will produce money for you.

What to do when Mutual Funds give Negative returns?

In tough times, a good investor invests, and in good times, he reaps the advantages of his investments. When Mutual Funds are providing negative returns, there are a few things one should keep in mind:

  • Always keep the investment objectives in mind. Short-term market or NAV volatility should not affect the investments. Every few years, markets go through uptrend and downturn cycles.
  • One can boost SIP flows in a declining market to average their assets if the investments are excellent and they have an investment horizon.
  • If investing in mutual funds, one should consider putting a stop loss in place. If the NAV falls below specific criteria, they should reconsider your assets.
  • Any investment that declines by more than 20% is in a bear market. In this case, an investor with a shorter investment horizon should withdraw and wait for the markets to calm down before re-entering with a new list of mutual fund schemes that meet his criteria. Keep an eye on the mutual fund holdings. One should avoid mutual funds having more extensive exposure to low-quality stocks. As the firms struggled to stay solvent, certain mutual funds that held Yes Bank, Manpasand Beverages, DHFL, and Jet Airways in equity funds saw their NAVs plummet.
  • Investors should regularly compare the performance of funds in the same category and from various types.
  • Investors should watch market cycles and economic developments while evaluating their investments. Credit risk funds, for example, will struggle in a market where corporations are defaulting on payments.
  • Every six months, investors should rebalance their mutual funds according to their investment objectives, market cycles, scheme portfolios, and past performance. One can also contact a SEBI Registered Investment Advisor for a portfolio health check-up.
  • Investors should constantly make sure their mutual fund portfolio is sufficiently diversified to avoid portfolio risks.

Some mutual fund schemes, such as tax-saving ELSS, have a three-year lock-in term. In terms of returns, such strategies often underperform. After the lock-in period, investors might contemplate leaving their assets and switching to better categories and mutual fund schemes based on their investment objectives.

For example, mutual fund returns will be more significant in a Bull Phase in Midcap and Small-cap Mutual Fund schemes. Returns from Gilt Mutual Fund undertakings will be the greatest in Debt categories during a period of declining interest rates and an uncertain economic climate. Pharma industry mutual fund schemes will do well during a pandemic and with chances for an increase in demand for health and the medical sector.


The bottom line is that an investor must consider the market environment before deciding which Mutual Fund category to invest in. Remember that the liquidity of assets in the asset class, the performance of underlying securities held by the Mutual Fund, and expense ratios all contribute to high Mutual Fund returns.