Losing Money in Mutual Funds? 5 Steps You Can Take Right Away

Markets are like sea waves, going up and down at periodic intervals. Riding the waves when they are up can reap rich dividends. However, it doesn’t mean that you quit surfing when they are down. In fact, that is the time to wait out patiently and hone your investing skills.The downward slide of the markets will tempt you to redeem your funds, especially if the large chunk of your investment is in equity, to counter any supposed loss. But that is exactly what they are. The losses reflecting in your portfolio is an estimate and completely virtual now. Redeeming your funds will concretise it. That is surely not a well-thought investment strategy.If you are in a dilemma, then here is what you should do if you think you are losing money in the mutual funds.

It’s an old adage that says investors lose money in either greed or fear. Thus, a state of excitement or panic is not good. Often investors panic when the markets hit a low. And if you have invested in equity-linked mutual funds, they may get affected. However, making decisions based on short-term lows and highs can be a big mistake. While markets fluctuatein response to sudden global events (wars, pandemics, and more), they almost always bounce back. In the long run, the chances of earning positive returns go up tremendously.

Until you redeem your funds, the losses are only on paper. They get real when you decide to redeem the funds unit at low NAV (Net Asset Value). Many times, investors think of putting a stop loss by redeeming the funds at lower NAV when the market hits a bear phase and looking for opportunities to re-invest when the markets hit its lowest.Timing the markets like this is never advised. In fact, fund managers are professional who are experts at handling such situations and balancing positions to help you optimise your returns. Thus, stick to your financial plans and goals and leaving the market decisions to the fund managers can be the best bet in the situation. And remember, markets always bounce back in the long-run.

If you own more than one mutual fund, it is time to look into it individually and identify the red flags. The red in your portfolio might be because you have invested all your money in one sector/industry. It has been very evident for quite some time now that there are specific sectors that have always shown a slow growth despite the market conditions. And it is even harder to foresee their future trajectory.Your only way out is to do thorough research. Find out everything you can, about the past and present growth scenarios, about the sector you are invested in. If your analysis predicts a healthy growth, then remain invested or else redeem your fund and put it in a different industry. However, if you are not an expert, it may be best to avoid sector-specific or thematic funds as they are riskier compared to diversified funds.

While markets always bounce back, it doesn’t mean you have to do nothing. When the markets enter a bearish phase, it is best to re-asses your portfolio and compare the funds you have with others. You did it in the beginning when you were first making your investments. For instance, if you are currently invested in a small-cap equity mutual fund, compare it with the other higher-rated funds in the same category. If there is not much difference in the performance of the two, then hold on to your investment. However, if the contrast is stark, you may consider switching.Similarly, you can do a comparison between two categories, for example, small-cap and large-cap funds. Small-cap funds are riskier in comparison to large-cap ones but, they also come with higher return potential. Explore different categories of mutual funds and compare their performance with yours. However, make sure you compare performance of last 5 years or more to ensure you can see how it is performing in the ups and downs.

Lastly, to mitigate any loss in the short-term, it is best to diversify your portfolio. Many investors, invest solely in the equity funds. As mentioned before, equity funds are linked to the stock markets. Thus, any fluctuation in the market will affect the funds as well. The answer to this problem is to prepare a portfolio with the right mix of equity and debt funds.Balance your long-term equity exposure with the right proportion of lesser risk instruments such as money market mutual funds. Also, follow this pattern across asset classes as well. Seek advice from an expert who can guide you to re-design your portfolio according to your financial goals and risk profile.You can either choose to diversify by redeeming your mutual funds and then re-investing or you can also choose to make new investments. Consider SIPs that help you take advantage of the Rupee Cost Averaging (RCA) letting you buy more units of the funds when the markets are low.

So, when the markets are down, do not let your investments go down with them. Neither be willing to accept the loss in haste. Yes, the results are not as promising now, but in the long run, you will get what you hoped for as long as your portfolio is built on sound principles and in line with your goals.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.