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%
(c) ICICI Prudential Dynamic Fund: -2.79%
(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.
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Hi Nitin, little confused with this article. We often hear that the minimum tenure for equity to grow is 5 years and above. Do you think shares or SIP purchased at this time will not give good return even after holding for 5 Years ? or are you saying market is at such situation that there might not be chances for better time even post 3-4 years. I agree that situation might be worst in coming months but we do not know what is the bottom..so does it not make sense to continue with SIP and hold on to it for a longer tenure.
It is all marketing gimmick from market operators. The long term return of best performing mutual funds is just 10%-12% even after great run in 2014 with an assumption that you placed bet on right horse. The same holds for stocks. Stocks like Vedanta, Tata Motors (even after recent rally), Cairn, Sun Pharma, Cairn, L&T etc are trading at multi year low. The PSU stocks are also in same boat.
As i shared in my post, the entry and exit point is crucial. In my opinion, it is time to exit all equity investments and wait for return of FII’s before any fresh investment.
I am a newbie to equity and share market, Could you please suggest simplest way to understand the terms and how to learn investing in it. I am an IT professional and not very good at Finance. I work with Wipro Technologies and Wipro has provision for employees to invest in there shares, is it good to go for it, what are the checks.?
As a new investor, i will not prefer direct exposure to equity market. You may start a SIP in Balanced Mutual Funds to understand the nitty gritty of the market. Once you are comfortable, you may switch to Equity Mutual funds and then to direct equity exposure. It also depend on your Risk Appetite. Personally in IT space, i will prefer stocks of Infosys and Mindtree.
Thanks Nitin
I am a newbie to equity mutual funds. But I believe in growth and I am more optimistic about business.
Thanks for writing this post. But your statement, “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.” itself is misleading.
If it is bad time now, then people should be investing right and wait for good time(vest) to reap the benefit.
SIPs are designed to address market volatility(though not fully). I am just talking about business here. I am just questioning the very basic reason why would some one do business. Obviously for profit. so companies do business for profit. I have at least not heard anyone failing in making profit in big companies by investing for long term(say 5 – 8 years). I don’t want to talk about traders here. I have seen most of the nifty companies publish year on year growth as positive.
To me, Business cycles are all about ups and downs and how would it be logical/sensible to partner someone in their good times and leave/sell of or blame when they are facing tough time? Then its not partnering. Again I am not talking about traders.
Kindly pardon my ignorance. Please let know your thoughts on this.
Thanks for sharing your thoughts. As i mentioned in my posts that profitability is a key concern for indian corporate. Secondly, as an investor we should be concerned about FII exit from Indian Market. Let’s accept that FII’s know more than retail investors like me. Therefore, outlook is not so great at this moment. Let’s wait for right moment to invest. As of now there are NO +ve triggers.
The long term returns of average funds is 8%-10%. Therefore entry and exit is key. It is imp to time the market.
Nitin, Thanks for sharing your opinion.
I have two questions to ask you.:
I have three funds and all are in Small and Mid Cap schemes.As per the trends I have seen this category of funds are performing consistently. Returns are less(Other categories are even lesser) but not negative.
1.Would you suggest me to keep investing or shall I stop the SIP?
2. Can you suggest me how to diversify my portfolio to balance out.
Some add. info:
Current Portfolio 5000 per month in total as below.
DSP BR Micro Cap 2000/-
SBI Magnum S (Just Started) 2000/-
Reliance SMall Cap 1000/-
I have Moderate Risk Appetite and tenure is 6-8 Years I can stay invested.
It is advisable to diversify the portfolio.