Can Mutual Funds Give Negative Returns?

Mutual funds are one of the most popular investment option, where money from several investors is pulled in to invest in a variety of assets. These may include stocks, bonds, and other securities. Although mutual funds do give very attractive returns, there are indeed risks associated with mutual funds. It's essential to understand that mutual funds can indeed give negative returns. This means the value of your investment can decrease, resulting in accumulated losses. Various factors such as market volatility, economic conditions, and fund management, contribute to this loss. Know all about these risks and how to mitigate them in the paragraphs below.

While yes is the answer if you are asking can mutual funds give negative returns, it is crucial to know their categories. The mutual funds are categorised according to their investment intentions and strategies. Equity funds primarily invest in stock, offering higher growth potential but at the same time high risks due to market volatility. Debt funds invest in fixed-income securities like bonds and government securities, offering safer options with generally lower returns compared to equity funds.
 

Hybrid funds mix investments in equities and debts so as to diversify the risk-and-reward balance of its portfolio by different asset classes. Index funds are aimed at mimicking the performance of a particular index, say Nifty 50, so that investors get broad market exposure and diversification at a very low cost by being passively managed.
 

Some funds specialise further within these sub-sectors. For instance, technology or healthcare, offering focused exposure but also a higher risk because of a lack of diversification. Some funds offer tax-saving benefits under Section 80C of the Income Tax Act – a feature that is much loved by investors with a tax consciousness, falling next only to the investment in tax-free bonds. The learning and understanding of these categories by investors help them use mutual funds to align financial goals with the risk-tolerance level and investment time horizon best.

Let us now look at the key takeaways on the investment period:

• An investment period, in the case of the life cycle of a private equity fund, is defined as what marks the active seeking of initial investors, right after the formative stage of the fund.
• An investment period is the time when the fund enters into Limited Partnership Agreements with the initial investors, and the capital is deployed into the chosen portfolio companies.
• The usual time frame of an investment period lies between 3 to 5 years.
• The investment period is the time frame that falls in between the formative stage and the harvesting stage.
   

You must note that the investment period is not equivalent to the commitment period. The commitment period is when the Limited Partners fulfill the promises they made, and disburse the capital agreed upon on the call of the General Partner. This is a much longer tenure which lasts for 10 years or more.

After the formative stage of the life cycle of a private equity fund, the next important stage is an investment period. The investment period involves seeking out investors, entering into agreements, and the deployment of funds. Once a private equity firm completes all the legal formalities involved with the creation of a fund, the General Partner (or GP) is responsible for fund management, and establishes the structure of a limited partnership.
 

At this point, what the private equity firm requires is funds for finalisation of deals with the portfolio companies which have been selected in the pipeline. This is the stage wherein the PE fund enters the investment period. During this time, the General Partner has to make capital calls and/or sources of investment. After going through with due diligence on the companies, the General Partner has to negotiate and allocate the funds to these underlying companies.
 

The General Partner then has to proceed with capital calls wherein the Limited Partners are informed to contribute the amount they have committed. This procedure is also known as “drawdown”. A Private Equity firm functions on behalf of the investors, as it deployed their money in investment opportunities that are profitable, and manage their investments.
 

Also, do note that the investment period of a private equity fund is significantly different from that of mutual fund schemes.

If you are wondering what to do if mutual funds are giving negative returns, read on.
 

The various mutual funds in India offer different returns based on the type of fund and the market at that particular time. Equity funds have the potential to give high returns, mostly during bull markets. These funds basically invest in stocks, and hence they are very volatile. Although they can produce returns of 10% to 15% per annum over the long term, they equally suffer dramatic losses when the market goes bad. Examples of funds under this class include large-cap, mid-cap, and sector-specific funds.
 

Debt funds are a category of funds that offer more stable returns, for they invest in fixed-income securities like government and corporate bonds. They are less volatile than equity funds, typically offering around 6% to 9% returns per annum. They are interest-rate-sensitive, though; hence, rise in interest rates may hurt their performance. This also includes liquid funds, short- and long-term bond funds, therefore suitable for a conservative investor looking at lower risks.
 

Next in line are the balanced funds or hybrid funds, aimed at offering moderate returns through an 'equity-debt' portfolio. The rationale behind such funds is to balance risk with return. These types of mutual funds provide returns between 8% to 12% per annum, depending upon the particular fund's distribution of assets and the prevalent market conditions. Such funds may be more oriented towards equity or debt and hence appeal to a different set of investors with varying risk appetites. Other than these, index funds that invest in market indices like Nifty 50 or Sensex provide returns linked to the overall trends in the market of around 10% to 12% per annum. In this regard, tools like the Mutual Fund Calculator can help estimate potential returns based on past performance.

Here are a few things to keep in mind if you are asking can mutual funds go negative:

1. Stay calm and assess the situation

Avoid panic selling. Sudden market declines can lead to hasty decisions and actual losses. One should remember that market volatility is a part of the investment process, and downturns are almost always temporary. It is also important to analyse why one has received negative returns. It could be due to broader market corrections, economic changes, or sector-specific downturns. Grasping the underlying reason will help you make the correct choice.
 

2. Review your investment strategy

Check if your scheme is in line with your investment goal and your time horizon. If your goal is long-term, say retirement or a child's education, do not mind adverse fluctuation in the short term because, over the long term, markets usually bounce back giving an appropriate return to the patient investor. If your investment horizon is short – a duration of less than three years – negative returns are somewhat concerning and may need reassessment to include more stable debt-oriented funds.
 

3. Diversify your portfolio

The key to managing investment risk is diversification of your investment assets. Spreading across asset classes – equities, debt, gold, and real estate – can soften the impact of losses in one segment. Consider a mix of large-cap, mid-cap, small-cap, and multi-cap funds, and for debt exposure. Include a combination of liquid funds, short-term debt funds, and dynamic bond funds to balance your risks and rewards across different market conditions.

4. Consult a financial advisor

A good strategy in such a complex market, like India, would be to turn to a certified financial advisor. Such advisors are going to give you valuable insights regarding your investments and suggest changes to your portfolio in tune with your financial goals. Moreover, these advisors provide guidance in terms of tax implications on your investments such as long-term capital gains tax on equity mutual funds and indexation benefits on debt funds as well.
 

5. Regular monitoring

Check your portfolio periodically to ensure that the risk and potential returns remain in line with your financial goals and risk tolerance. Watching market trends and fund performance would definitely keep you alert for any potential issues. Leverage easy-to use online web and mobile platforms such as the Bajaj Finserv platform to track your investments effortlessly.
 

6. Avoid emotional decisions

Stick to your predetermined investment strategy unless there are significant changes in your financial situation or goals. Emotional reactions, whether due to fear in a falling market or greed in a rising one, can lead to poor investment decisions in the long run. 

1. Market conditions

The market conditions get largely affected by economic conditions like inflation, interest rates, and growth in GDP that play a big time role in deciding mutual fund returns. In the case of India, for example, a rise in inflation will lead to a rise in interest rates, thus discouraging the performance of the stock markets and hence the mutual funds. On the other hand, a great GDP growth rate and excellent market conditions, such as a bull market, would yield significant returns, while bear markets cause decline. All these affect the overall performance of mutual funds.
 

2. Fund management

The fund managers are at the core of a mutual fund because its success relies on their experience, skills, and decisions. Skilled fund managers can weather any market fluctuations and grasp opportunities that take lead from the fund's objectives and increase returns. Wherein frequent market volatility may be a factor, the role of the fund manager comes to the forefront. The acumen of the manager in making informed, strategic investments, based on research and market analysis, goes a long way in influencing the return that the fund can generate.
 

3. Asset allocation

Since mutual funds are usually a mix of assets such as equities, bonds, and cash, the style of asset allocation impacts its performance directly. Therefore, a diversified asset allocation can balance risk and return and hence provide relative stability in volatile times. However, if any one fund is highly concentrated into one particular asset class, say small-cap stocks, that would imply additional volatility and a higher degree of risk.
 

4. Expense ratio

The expense ratio or the cost associated with managing a mutual fund has a direct effect on the returns that an investor gets. In the Indian markets, especially where cost sensitivity is so high, funds with lower expense ratios are generally preferred, as they are known to otherwise yield better net returns. However, these costs have to be balanced against the fund's overall performance and the quality of its management.
 

5. External factors

Mutual fund performance can also be influenced by external factors such as geopolitical events, regulatory changes, and global economic trends. In India, sudden changes in government policies, global trade tensions, or shifts in foreign investment flows can lead to unpredictable changes in mutual fund returns. Although these are not really within the control of fund managers, their performance impact can be huge and investors should always be updated in this regard while considering the risks at the time of investment.

1. Diversification

One of the most important strategies to help minimise the investment risk is through diversification of your investments across various asset classes, such as equities, bonds, and real estate, as well as various mutual fund categories. This can be done by not putting all eggs in the same basket, thereby reducing the risk of being exposed to large losses in case one sector/asset class performs below par.
 

2. Regular investment

Under Systematic Investment Plans, one can mitigate risk through regular investing. An SIP allows an investor to invest a certain sum of money at a certain period of time. This shall automatically get the purchase cost of the units averaged out over time. By investing consistently, you can benefit from rupee cost averaging, which can lead to better long-term returns.
 

3. Periodic review

To keep the portfolio in sync with your financial goals and risk tolerance, periodic reviews are essential. This would help you adjust your investments on time and right in fast-changing market conditions and personal circumstances. It entails either rebalancing the portfolio, shifting the assets from high-risk to more stable investments, or capitalising on new opportunities coming up in the market. It would ensure that your investments are always on course to achieving your financial objectives through an organised review process.

4. Risk assessment

Knowing your risk tolerance is important in structuring your investment portfolio. In India, the conservative investor may then turn to debt funds for greater stability. On the flip side, aggressive investors will find equity funds more appealing since this potential gain is associated with a larger serving of risk. Volatility of the market gets managed once your risk appetite has been assessed and matched with the right kind of investments that reduce the chances of substantial losses.

Can a mutual fund go to zero? Yes, it can but it does so very rarely. Similarly, Mutual funds can occasionally deliver negative returns due to factors like market conditions and fund management. However, you can mitigate these risks through asset diversification, regular investments, and seeking expert advice. Staying informed and proactive in managing your portfolio is crucial for better investment outcomes. For more insights on investing in mutual funds , compare mutual funds, use the Mutual Fund Calculator, visit the user-friendly Bajaj Finserv mutual fund platform today. Get real-time market data on over 1000 mutual funds, estimate your potential returns and plan your investments effectively.  Moreover, adopt a disciplined strategy to navigate market downturns and achieve long-term success.