6 Things to Do When Losing Money in Mutual Funds.

Keep Calm?

This is the absolute first step to successful investing.

The stock markets usually perform well over a long period. In the short term, volatility causes the price to go up and down. While there is loss in mutual funds due to short term market disturbances, if you look at the long term, instances of negative returns drastically reduce after 3-4 years of holding.?

Avoid Redeeming In Haste?

Can you lose money in mutual funds in falling markets? Yes. But does this mean you should redeem your investments? No. Think twice before redeeming your money the moment you see the markets perform poorly.

Equity mutual fund that are redeemed a year before investing attract an exit load of 1% in most cases. Even after that, LTCG tax may be applicable if your gains from that investment are above Rs 1 lakh for any given financial year.

Certain investors believe they can take their money out of a mutual fund when its value goes down and then invest again when the value starts climbing up again.

This sounds good in theory but usually does not turn out well. What happens most of the time is that people take out their money from a mutual fund and wait for it to stop falling and start climbing again.

But more often than not, the timing isn’t perfect. What ends up happening is that people sell when the price falls. And then, when they plan to invest again, they invest at a price higher than what they sold their mutual funds for. This hurts the long term wealth creation process.?

So decisions like redemption should not be a factor of current market conditions. Investing in equity mutual funds via the SIP route is what comes to rescue in such cases since SIP frees you from market timing. It also leverages rupee cost averaging to buy you more units when the markets are down.?

Compare Performance With Other Funds in the Same Category

You may feel the mutual fund you have invested in is not performing very well. This may or may not be a time when the markets are doing well.

A good strategy at this point is to check your mutual fund’s performance with similar mutual funds.

Compare Performance With Other Funds From Different Categories

If you are wondering can mutual funds lose money, then the answer is yes as some mutual fund categories are more volatile. This means, while they might offer great returns, they can also offer higher risk.

If you feel you are not up for the risk, you should look at the performance of mutual funds from other categories.

Research the Sector

Another reason why your mutual funds are falling could be because your investments are sector focused. This point is relevant to you only if you have invested in a sector fund. Sector funds invest only in a specific sector or industry.

Even when the markets, in general, are doing well, certain sectors can suffer.

If a certain sector is underperforming, you must research the sector carefully.

Diversify?

This is perhaps the only way to counter your?mutual fund loss at the moment. If your portfolio is exposed only to equity, then add some liquid funds to the mix. They will not only balance out your losses due to equity but will also allow you to raise money for short term goals.

Even within equity mutual funds, diversify among small-, mid- and large-cap funds.

Also, diversify across asset classes. Gold is considered as an excellent hedge against market volatility as gold prices usually go up when the markets are done.??