Negative returns in mutual funds are nothing unheard of. It can happen with the best of mutual fund investment strategies and the best of expert advice on mutual funds. For example, if you had invested in equity funds at the peak of the 2007 cycle or even the 2011 cycle, then you would have faced negative returns for quite some time. In fact, some of the equity funds in the post 2008 period saw price damage to the extent of 35-40%, which can certainly be nerve racking. Investing in mutual funds is all about calibrating your strategy and here is what your strategy should be, especially when mutual fund NAV below 20. Here is a 4 step model to follow especially if you are looking at mutual funds as a long term investment strategy.

Rolling returns are normally reliable

Fund returns must always be seen in perspective. You have to better than your peers in bullish markets but you must be less awful in bad markets. It would be naïve to believe that your mutual fund would give positive returns when the Nifty is down by 20%. As long as your capital is protected better, you are surely better off. But how can you identify such funds? Remember, 3 year rolling returns for 8 quarters in succession can do the trick. If your fund continues to underperform consistently on this measure, something is wrong and you must think with your feet. A 20% correction is not much to worry about in your long term plan, as long as you are invested in the right funds. More often than not, the problems that are specific to your fund may be making matters worse in the overall scenario. At least, get rid of the unsystematic aspect of your risk.

Remember the golden rule; when it trouble rely on SIPs

Lump sum investing is, by default overly dependent on your market timing. You know quite well that you can never time the market and the Indian weather. This approach can largely protect you against negative performance. In fact, a phased approach can actually help you salvage your position when your fund is really down and ensures that you’re prepared and profitable when the market turns around. A SIP gives you the advantage of rupee cost averaging which works in your favour in volatile markets. That way, your average cost is reduced and you are more likely to be profitable compared to lump sum investing. A phased approach or a SIP approach actually makes time and volatility work in your favour. Rather than worry about the 20% correction, this approach can actually make the correction work in your favour.

Sector funds and thematic funds are strictly to be avoided

Sector funds and thematic funds appear quite attractive because of their concentrated portfolios. But they also give you concentration risks. When the sector or theme gets into down-cycle you are likely to remain in negative territory for a very long time. Investors who bought IT funds in 2000 or infrastructure funds in 2008 had to put with negative returns for a very long time. Mutual funds are all about diversification and hence as a matter of principle it is never a good idea to be invested in sector funds or thematic funds. In case you are invested in sector funds then either you must quickly take a call on the sector attractiveness or keep a stop loss. The same rule applies to thematic funds. If your fund’s portfolio is concentrated in interest-sensitive sectors like banks, NBFCs, autos and realty then you are exposed to thematic risk at a situation like today when rates are moving up.

How about talking to your financial advisor?

When a fund gives negative returns, it has larger implications for your returns as well as for your financial plan. When you craft a financial plan, you normally peg your funds to long term goals. If you fund gives negative returns, it could compromise your goals. You will either need to tone down your goals or increase your allocations. The easy out is to pick up the phone and talk to your advisor. Is the negative return due to the market or due to fund specific factors? Does he need to tweak the asset mix? These questions need clarity from financial advisor so that your long term financial goals are not compromised.

Remember, vagaries of the stock market are part and parcel of the long term investment game. What you need to ensure is that you are invested n the right mix of assets and that you are handing over your money to the right fund manager. When you lace it with a systematic approach to investing, a 20% correction is really not going to be too material!
 

Related Articles: Mutual Funds are more than just Subject to market risks | 5 tools for Analysing your Mutual Fund Portfolio - Mutual Fund Portfolio Comparison Tool | How to analyse Mutual funds for big returns | Should I invest in Mutual Funds or Stocks