Home Finance 7 Things To Do When Losing Money In Mutual Funds

7 Things To Do When Losing Money In Mutual Funds

by Phume Mdluli
Mutual Funds

Mutual funds have the potential to generate significantly high returns. If you invest in the right schemes at the right time, you might even earn returns as high as up to 30 to 50% per annum. However, as these investment options are market-linked, there are chances that you might lose your money as well. What do you do when such situation arises? Do you redeem your mutual fund investments? Do you get anxious resulting in sleepless nights? Here’s what you can do during such situations.

Things to do when losing money in mutual funds

Here are a few things that you can do if your mutual fund investments have dropped in value:

  1. Keep your cool and calm
    This is probably one of the basic necessities for successful investing. Under moments of panic, it’s good to remember that stock markets are likely to behave quite volatile in a short duration. However, when you look it through a bigger lens, these volatilities tend to subside over time. While it might seem that you are losing money right now, if you hold on to your investments for at least four to five years, the chances of you earning negative returns would drastically decrease.
  2. Keep your emotions at bay
    One of the soundest investment advices is to keep your emotions at bay when you invest in the markets. If you get emotional towards your mutual fund investments, or the fear of losing out your money is overpowering your ability to judge, then you are likely to make a wrong investment decision.
  3. Avoid redeeming your investments
    Experts frown at the idea of redeeming your investments at the slightest hints of volatility. When you do so, your notional loss would turn into real loss. Rather it is advised to wait out for your investments to ride out the volatility.
  4. Compare funds with other funds belonging to the similar sector
    If you feel that your fund is not performing well, then a good investment strategy is to compare mutual funds with their peers belonging to same sector. Doing so will give you a better idea about the performance of your mutual fund scheme.
  5. Compare your fund against underlying benchmark
    Another strategy that you can adopt is comparing the performance of your scheme to its underlying benchmark. If your fund’s performance is way below than the performance of the benchmark for a consistent period of time, you may want to switch.
  6. Research research research
    Another reason why your mutual fund might be performing poorly is because of the sector your fund belongs to. Even if the markets are performing well, some sectors might suffer. If your sector is consistently underperforming, then you should research the sector.
  7. Diversify your investments
    It’s very important to have a heathy mix of investments. When you diversify your portfolio, your losses arising from one type of investment can offset by another type of investment. As a good rule of investment, you must diversify your investments across asset classes, location, and sectors.

As mutual fund investments are market-linked, there are chances that you might lose your money. However, on the on set of your investments dropping in value, instead of taking a knee-jerk reaction, it’s advised to take a step back and look at the bigger picture. To avoid being invested in underperforming funds, you must constantly track the performance of your mutual fund investments on a regular basis. If your fund has been constantly underperforming for more than 3 to 4 consecutive years, then it might be a good decision to switch to another mutual fund scheme. If not, it is advised to allow your investments to ride out the volatilities and grow to their maximum potential. Happy investing!

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