What Investors Should Do When Mutual Funds Drop in Value

Mutual Funds are market-linked investments that are getting increasingly popular in India. However, it is important to know that prices of Mutual Funds can fall at times, which can be stressful and leave you unsure as to how to proceed. Read this blog post to know why Mutual Funds drop in value and what you can do when this happens.

Why Does This Drop Happen?

It is a very common question that arises in investors’ minds: why does the value of Mutual Funds fall? The answer is that most Mutual Funds invest your money in market-linked investments. Hence, the value of the Fund might get impacted when the market goes down.

Here are the main reasons why the value of Mutual Funds can dip:

• Economic Factors: Inflation, rising interest rates, global events or poor corporate earnings can influence market performance, thus affecting Mutual Funds’ value.

• Sector Downturn: If a particular sector like IT, pharma or real estate is not performing well, Mutual Funds that focus on that sector might see a dip in value.

• Global Uncertainty: Events like war, political instability, oil price hikes and international economic trends affect global markets. This, in turn, affects the Indian markets, including Mutual Funds.

However, there is no cause for undue worry, as these fluctuations do not mean your investment has permanently lost value.  In most situations, this is just a phase.

What To Do When Mutual Funds Drop in Value?

• Keep Calm: When Mutual Fund prices drop, the first thing to do is stay calm. Market fluctuations are normal and short-term drops are a part of investing. Instead of panicking, stay focused on your long-term goals and don’t get carried away by daily market news.

• Avoid Exiting in Haste: Feeling anxious when markets fall is normal, but redeeming your Mutual Funds in a hurry can hurt you in the long run. If you sell them too soon, you might have to pay an exit load. Many people sell in a panic when prices drop and buy them again later, which translates the notional loss into a real one, as you might end up buying the units at a higher price. Instead, stay invested, especially through SIPs, since they help you buy more units when prices are low.

• Compare Performance with Other Funds in the Same Category: If the Mutual Fund you have invested in seems to be underperforming, don’t make a quick decision to exit it. First, compare it with other Funds in the same category. For example, if you have invested in a Small-Cap Fund, compare it with other Small-Cap Funds and then take a call on whether or not to exit it, Do not compare it with other Fund categories like Large-Cap Funds.

• Research the Sector: If you have invested in a sector-specific Mutual Fund like banking or technology, your Mutual Fund’s value may fall even if the overall market looks fine. That’s because these Funds depend heavily on how one industry performs. To understand why Mutual Funds are falling in value, check if the issue is related to that sector. Look at the current trends, challenges and long-term potential of the sector. If the sector is just going through a temporary dip, it may bounce back.

• Diversify Your Portfolio: If you feel like a majority of Mutual Funds in your portfolio are falling in value, it could be because your money is invested in just one type of Fund. Putting all your money in Small-Cap Funds or in one sector makes your portfolio more vulnerable to losses. To reduce this risk, you can diversify your portfolio. Spread your investments across Large-Cap, Mid-Cap, and Small-Cap Equity Funds. You can also include Hybrid Funds and Debt Funds for more balance and stability. Diversification helps ensure that if one market area is down, others can support your overall portfolio.

Tips to Avoid Mutual Fund Losses

While you can't control the market, you can manage how you invest. Here are some helpful tips:

1. Set Clear Goals

Invest based on your financial goals and time horizon. For short-term goals, avoid Equity Funds. For long-term goals like retirement, Equity Mutual Funds are ideal.

2. Use SIPs Wisely

Investing via SIPs helps reduce the impact of market volatility and blocks the temptation to time the market.

3. Avoid Emotional Decisions

Don't invest because the market is doing well or exit in panic when it falls.

4. Review Periodically, Not Daily

Check your Mutual Fund performance every 6 months or yearly, not daily. Frequent tracking can lead to unnecessary anxiety.

5. Consult a Financial Advisor

If you're unsure what to do when markets are down, talk to a certified advisor. They can guide you with data-backed decisions..

Conclusion

Market dips are temporary, but your long-term goals are not. If you are worrying about your Mutual Fund investments falling in value, remember that these short-term declines are part of the investing journey and that that there is no need to panic. Understand the reasons behind the fall, compare performances wisely and diversify your portfolio. A calm informed and long-term approach is the best way to build wealth with Mutual Funds.