Harsh Reality of Negative Mutual Fund Returns

Negative Mutual Fund Returns is today’s harsh reality. In past, i always cautioned my readers that it’s a myth that Mutual Fund Returns cannot be negative. A market meltdown does not spare even the best managed mutual funds. I was quite disheartened to see some of the best names delivering negative returns on a y-o-y basis. The three months and six months Mutual Fund Returns are negative for almost all the mutual fund schemes. When i wrote a post, Why you should not invest in SIP? i received some sharp reactions in my mailbox. Mutual Funds are projected as safest bet to invest in equity market especially through SIP. In my opinion, it is a market gimmick to pull investors into the equity market. No one can imagine negative Mutual Fund Returns in their dreams and that too 4 star and 5 star rated funds of Value Research Online. You can imagine Mutual Fund Returns of lower rated or unrated schemes.

The biggest casualty is Large Cap funds followed by Multi-Cap funds. The mid cap and small cap funds are still in Green because of good run last year. The valuations of mid cap and small cap are exorbitantly high, and correction is overdue anytime soon. Compared to Stocks, the Mutual Fund Returns are slightly better due to the diversification of portfolio but it is quite a task to beat the tide. Due to recent global and domestic developments, the market sentiments turned negative. I was anticipating negative Mutual Fund Returns but not from following 4/5 star rated schemes

(a) ICICI Prudential Focused Bluechip Equity Fund: -0.88%

(b) UTI Opportunities Fund: -5.92%

(d) Principal Growth Fund: -1%

(e) HDFC Top 200 fund: -5.62%

The Mutual Fund Returns are shockingly low for Index funds or Nifty/Sensex ETF. The one-year returns are negative between -6.5% to -7.5%.

Source: www.valueresearchonline.com as on Nov 13, 2015.

The recent market meltdown has not spared SIP returns. An investor who started SIP during last 12 months must be observing negative Mutual Fund Returns from SIP investment. Off late, lot of myths related to Mutual Fund Returns are broken. Another major one is that Mutual Funds does not require regular monitoring. As i mentioned in my post 5 Myths about Mutual Fund Investment that it does require periodic monitoring. It is widely propagated that investors should continue to invest through SIP during market meltdown to take advantage of lower NAV. Here also i would like to differ from experts. Always remember that every fund/scheme invests in a particular set of stocks. The weak stocks fall more during bear market thus will take more time to recover even during a bull market. For example, Mutual Fund schemes with high exposure in weak stocks like L&T, Sun Pharma, ONGC, Cairn, Tata Steel or Vedanta will fall more. An investor is not aware of these details. Moreover, Correction in bull phase is acceptable to investors but current correction is due to negative sentiments. It might be the beginning of bear market till the sentiments improve.

How to protect Mutual Fund Returns?

Sometime back i wrote a post on how to control your loss in the stock market. The 5 points mentioned in the post apply to stocks. At the same time, mutual fund investment is also an indirect stock investment. Therefore, in my opinion all 5 points are also applicable to mutual fund investments. For an investor, it is important to protect your Mutual Fund Returns. It holds true even for SIP investments. Reason being all mutual funds schemes don’t perform uniformly during BULL or BEAR Phase. A winner of today might be the biggest loser tomorrow. Therefore, it is important to fine-tune entry and exit point for better Mutual Fund Returns. It is also necessary to put a STOP LOSS to your mutual fund investments. Also, as i mentioned in my post that you should identify SELL signals. If an investor is convinced that current meltdown is not a correction but the beginning of a bear market or Stop Loss is hit, it’s time to EXIT all mutual investments. Once the bearish phase is over, you identify a fresh list of mutual funds that fell less during the carnage for future investments. The mutual fund returns will be BEST during bull phase from these schemes. A comparatively lower fall means scheme has invested in strong stocks. The strong stocks deliver maximum returns during BULL Market.

What to do next?

Always remember that NO ONE KNOWS THE BOTTOM/PEAK OF THE MARKET. The BIG question is what to do next?. if you started mutual fund investment during last 12 months, then your returns will be either negative or flat except mid cap & small cap schemes. In such a scenario, it will make financial sense to PULL out from all the mutual fund investments. My objective is not to create panic but to be practical and safeguard investments. If you are still in a green zone, then fix a STOP LOSS for your Mutual Fund Returns say 9% (Returns offered by Fixed Deposit). Once Stop loss is hit close/exit your SIP and withdraw all mutual fund investments. Though you may get assurances from experts that it just a correction during BULL Phase. It may be true, but you can always re-enter when the market sentiments improve. As per my understanding, the market will be more volatile and uncertain during next few months. The Fed Rate hike in December and fate of GST bill during winter session will add to this volatility. The Q2 earning season was a washout and analysts believe that Q3 will not be better than Q2. It will take few more quarters before we can see improvement in earnings. Here i do not sound cynical but FII’s pulling out money from Indian Equity Market is not a good sign. Always remember that it is not the end of the road for Mutual Fund Returns. It’s a human psychology to believe that current trend will last forever. Which is not true?. The cycle will turn again but when, No one knows. Market need +ve triggers to turnaround. A good investor, invest during bad times and reap benefits during good times. On the other hand, a bad investor invests during good times and exit during bad times.