Mutual funds are considered to be a safe investment. You get the expert decision-making of fund managers who create an investment portfolio within the fund scheme to allocate your funds to high growth and stable instruments. You also get the choice of selecting categories and sectors while investing, as per your risk appetite and investment goal. That said, it is theoretically possible to lose it all in mutual funds.
All that needs to happen is that every stock or instrument in your fund scheme’s portfolio must lose its value and get reduced to zero. This is possible in the case of one stock where the company’s poor performance can lead to its bankruptcy, resulting in you losing everything that you invested. But for a mutual fund to go completely bust, dozens of stocks and investments must go bust at the same time. It is possible but not quite plausible.
How is risk managed in mutual funds?
Mutual funds invest in a variety of stocks, bonds, commodities, and other instruments. If the country’s economy, in general, performs poorly, the return of all these investments can reduce significantly. But the fund managers of mutual funds analyze the market regularly and look to optimize the portfolio consistently. If a particular instrument, stock, or sector is not performing well, the fund manager can switch to a better alternative.
The investor can also monitor the performance of the mutual funds they are invested in and exit from poorly performing schemes. For instance, if your SIP in equity mutual funds is not performing well, you can redeem it and go for a gold ETF SIP instead. This is how risk can be managed both at the investor and at the mutual funds’ end.
How can mutual fund performance deteriorate?
The profitability of mutual funds can reduce due to a variety of factors. Market volatility can take a toll on the returns of a SIP. Similarly, stagnation in economic growth can lower the returns. If the company or industry is not performing well, the return of the stock(s) will be less than expected.
Mutual funds may lose their value due to bad management or scandals as well. A poorly managed mutual fund may run out of money through bad investments. Dishonesty of the fund manager can lead to the collapse of the scheme’s financial worth. In such scenarios, the fund units will reduce in value.
How to handle poor mutual fund performance?
Poor mutual fund performance is not unheard of. The investor must understand the cause of the poor performance. If it is due to the usual market cycles, the investor shouldn’t panic as the market usually recovers from such blips. However, if all peers are performing well, the poor performance of one isolated fund scheme must be looked at more thoroughly.
Performances of all mutual funds can be conveniently checked on the Tata Capital Moneyfy App. Investors can now get the details of various mutual funds on the highly user-friendly platform, Moneyfy App.
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