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Things to Do When Losing Money in Mutual Funds

Mutual fund loss is a probability when you invest in the market2 since the market fluctuates constantly. Therefore, in case of facing losses in your mutual fund investments, it is essential to stay proactive and informed.

Individuals who seek to attain financial security and create wealth for themselves indulge themselves in various investment plans. There are various investment plans with higher returns, such as Public Provident Fund, Gold ETFs, etc.
 

However, investing in mutual funds is a go-to option for individuals who seek higher returns compared to other financial instruments like fixed deposits, recurring deposits, etc. Mutual funds are also diversified in various categories, such as equity mutual funds, bonds, short-term debt funds, etc.

Since equity mutual funds are market-linked2, they can be volatile. This means if the market goes up, they will generate higher returns, and if the market goes down, it can create chances of loss in mutual funds.

When individuals notice mutual fund loss, they start panicking and making hasty decisions. This blog will cover what to do when losing money in mutual funds.

Why does Mutual Fund Loss Happen?

Mutual funds depend on the market, but they can generate higher returns if invested wisely and cautiously. Some of the reasons why individuals face mutual funds loss are:
 

  • Lack of Knowledge

    One of the prominent reasons for mutual fund loss is a need for more knowledge about the investment options and market. Individuals who invest in mutual funds without proper research often end up in a situation where they have to face a loss of money.
     

  • Unreliable Fund Managers

    Another thing that causes mutual fund loss is unreliable fund managers. Generally, fund managers are experienced professionals with years of experience under their belt. However, some fund managers may not do their job properly, leading to a loss in mutual funds.

  • Expectations for Unrealistic Profits

    Mutual funds take longer to get high returns. If you invest in mutual funds with unrealistic profit expectations in a short span of time, it can compel you to make hasty decisions, resulting in a loss of mutual funds.

What to Do When Losing Money in Mutual Funds?

The stock market is volatile and may fluctuate at any time. However, investors start panicking when the market goes down, if they have invested large chunks of money in equity funds. Here are some suggestions to follow when you start losing money in mutual funds instead of redeeming your funds mindlessly.
 

  • Keep Yourself Composed

    The fundamental step to learn before diving into stock market options is to keep yourself composed. The market can be very volatile, and stocks can go up and down, so losing your breath every second can be very taxing for your mental health.
     

  • Refrain from Redeeming in Haste

    Investors often redeem their funds quickly when they face losses in mutual funds. The mutual fund's loss is only on paper unless you redeem. Losses get real when you redeem the fund. Not only this, but when you redeem in haste, you need to face the exit load.
    Those who invest in equity mutual funds and redeem before a year have to pay an exit load of 1%. Not just this, LTCG (long-term capital gain) taxes are also applicable if the investment amount is above ₹1 lakh during the fiscal year. That is why it is best to wait instead of redeeming the funds 
     

  • Identify the Red Flags or Mistakes

    If you have a portfolio with multiple funds, then it is time to identify the red flags or mistakes. You must have made some patterns or mistakes while investing in funds. It might take some time, but if you can identify these flags, it will help in covering up the losses.
     

  • Do a Performance Comparison with Other Funds in the Same Category

    Another thing to do when you face loss in a mutual fund is to do a performance comparison with other funds in the same category. It means checking the response of funds in the same category, such as comparing small-cap funds with other small-cap funds.

    If, in your findings, you observe slightly poor performance, then switching might not be a suitable choice, as mutual funds work well in long-term investments.
     

  • Do Performance Comparison with Other Funds in Different Categories

    Further, to pinpoint an exact reason what is causing loss of mutual funds is to compare funds performance with different category funds. For instance, small-cap funds are riskier than large-cap funds but offer high returns.
     

  • Do Thorough Research About the Sector

    One of the significant reasons for losing money in mutual funds is if it is entirely focused on the sector market. These are the funds that invest in particular industries or sectors. The problem with these funds is if the market, in general, is performing well, these sectors can suffer loss, resulting in loss in mutual funds. Unlike equity funds, predicting the future of a sector fund is challenging; hence, it requires thorough research before investing. 
     

  • Diversify your Portfolio

    Lastly, to counterattack the loss of mutual funds, a significant step is to diversify your portfolio. Creating a diverse portfolio helps minimise the risk, such as having liquid funds helps balance out losses due to equity funds. Not just this, dividing equity funds within large, small, and mid-size will raise money.

Conclusion

Mutual fund investment depends on the market, which goes up and down throughout the day. There can be specific reasons for the market's decline, such as political crises, recessions, elections, etc. So, if you notice a loss in your mutual fund portfolio, it is best to keep yourself calm instead of making a big decision. The aim should be a long-term investment plan while dipping into mutual funds investment, as it works well. Also, build a mutual fund portfolio that aligns with your long-term financial plan.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What is the right time to sell losing mutual funds?

If the mutual fund is not performing well for a certain period, investors would consider selling it.

Where do I show mutual fund losses in my income tax return?

Under the Income Tax Act, investors must disclose capital losses and gains from mutual funds in ITR. One must file ITR Form 2 or 3 if they have earned capital gains or losses during a financial year.

Can there be losses in mutual funds?

Losses in mutual funds are expected as it depends on market conditions, but redeeming in haste can bring the losses in reality. Some reasons for losses in mutual funds are lack of knowledge, unrealistic expectations, etc.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication. However, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • 2Market-linked returns are subject to market risks and terms & conditions of the product. The assumed rate of returns or illustrated amount may not be guaranteed and depends on market fluctuations.