What to do when your Mutual Fund portfolio is in the red

Investing in Equity Mutual Funds means having to go through a fair share of ups and downs.

Now despite most investors wanting to believe that they are long term investors, history has proven again and again that more likely than not, panic sets in when one’s Mutual Fund Portfolio goes in the red.


One of the many defenses that have been put forward is that investors in developed and developing economies react differently to equity investing, this again has been proven to not be as significant as it has been made out to be.

Humans are humans after all,we react more than taking a detailed stock of the situation before applying logic.

You cannot rationalize human emotions but you can always learn to get a better grip on them.

In this article we look at what you should do when your Mutual Fund Portfolio is in the red and under-performing.

Look at the Overall Market
> Look at the overall market conditions before forming an opinion on your schemes.

> If the entire equity market is going through a difficult phase then there is no reason for your Mutual Fund portfolio to be an exception.

> Now let’s assume the overall market is at a healthy stage but your mutual fund portfolio is still red, in such a case you would need to look at the category of schemes that you have invested in.

> For eg. Mid & Small Caps tend to be more volatile than Large Cap Funds so they are mostly affected by sensitive market conditions.

To put it simply, if the overall market is doing fine but your portfolio is not then you need to have a detailed look at your mutual fund portfolio.

Do you have a strategy in place? If you do not have one then it becomes very difficult to ascertain whether or not you are directed towards your goal.

> More often than not investors invest in particular schemes based purely on the basis of past returns and then panic at the very mention of volatility.

> Having a strategy means you have a goal which in turn means you have a plan to achieve that goal. If you do not have one then you would keep on investing and redeeming with no chance of taking advantage of compounding that comes with long term equity investing.

> Another benefit of having a goal is that it helps you know how near or far your goal is. This in turn makes you realize that a long term goal cannot be achieved with a short term mindset and helps you calm your nerves.

Investing for high returns and redeeming due to market corrections is not a goal, it never was and never will be.


There is absolutely no way anyone can ever predict the exact movements of the equity markets. If anyone claims so then run away as far as possible from them, this is good advice for both your money and health.

> When you work with an advisor you can from time to time take a stock of your Mutual Fund portfolio.

> An advisor can help you stay calm and not panic during difficult times, it is during such times that the real value of both an advisor as well as having a plan really comes to the fore.

> The biggest blunder that most investors if not all commit is paying attention to advice from friends, family, relatives, colleagues, random strangers on the internet, etc. and yet when things go south, the same people will not be overflowing with answers.

The issue is quite simple and straight forward, any advice that translates into action be it investing or redeeming should also be scrutinized when things go south. It is easy to give and take advice but not so easy being accountable for them.

Risk Profile
Investing in Equity Mutual Funds does have its fair share of risks but a risk is only a risk when you do not know what you are doing.

There is risk and then there is calculative risk, the former means investing blindly keeping in mind only returns whereas the latter means trying to find a fine balance between risks and returns.

You need to keep in mind the following points:
    a)  Your age
    b)  Your time horizon
    c)  Whether any emergency fund has been kept aside
    d)  Your expectations
    e)   Your goals etc. among other important points

Risk is personal and not general and therefore so is Risk Profiling.

There are several examples of investors in the past investing in aggressive schemes like mid & small only for 2 years based purely on past returns.

There are also several examples of investors of investing their entire life savings into mutual funds when the markets have done extremely well in one year.

Changes to schemes
If your Mutual Fund portfolio is in the red then also keep a keen eye on any changes to your schemes.

There are several changes that could possibly affect your portfolio, they are as follows:
    a)   Change in Fund Manager
    b)   Change in Scheme Category
    c)   Over exposure to one sector or scrip

Change in Fund Manager
> Every fund manager has his or her own style in managing the fund.

> For example Axis Large Cap Fund saw a change in fortunes after changing their fund manager. Of course attributing the entire success to the fund manager would not be fair but it surely did have an effect on the performance of the fund.

Frequent changes in fund manager is never a good sign for an AMC.

You need to give some quarters to a fund after changes in a fund manager to make any decision.

Change in Scheme Category
> After SEBI’s re-categorization exercise of 2018, except for Multi Caps all other equity mutual funds have to deploy funds within the parameters as decided.

> For example In the first half of 2019, Mirae Asset India Equity Fund which was a Multi Cap Fund was converted into a Large Cap Fund.

> A Large Cap fund by SEBI mandate needs to invest a minimum of at least 80% into stocks classified as Large Cap stocks.

> A Multi Cap fund is under no restriction and is free to move around market sectors.

> Now imagine if you had invested in the Large cap fund looking at returns of the fund when it was a multi cap fund, you would surely be disappointed with the recent returns.

This is a prime example of why investing in a scheme based solely on past returns is a fruitless exercise, in fact after SEBI’s re-categorization of 2018 returns of most schemes has become redundant.

Over exposure to one sector or scrip
> When a fund takes a heavy exposure to one sector or scrip and that very sector or scrip is going through a difficult phase then chances are your mutual fund portfolio will also reflect.

> Let’s say your fund has taken a good portion of its exposure to the petroleum sector which mind you is a very sensitive sector.

> Any recent event, be it changes in policy, prices or any international event will have a bearing on the respective stock prices too.

Motilal Oswal Multi Cap 35 Fund and SBI Large & Mid Cap fund had taken a sizeable exposure to Vakrangee and when that stock tumbled, it did have a significant effect on those two funds as well.

Asset Allocation

> Never invest your entire life savings in equity mutual funds.

> Prior to investing, you should make sure you will not needing the amount for at least the next 5 years, the longer the better.

> First time investors have clearly not seen the different market cycles but even the ones who have, tend to get very jittery during a market correction.

> When you have executed proper asset allocation, more or less such worries are taken care of by themselves.

You need to align your investments with your goals by dividing them accordingly, the following table will give you a rough idea.

Short Term Goals
1-3 years
Medium Term Goals
3-5 years
Long Term Goals
More than 5 years


If you are one of those naïve investors investing in mutual funds via banks then please read the following very attentively.

‘’Banks are not the most sensible option for Mutual Fund investing for reasons mentioned below’’

> Imagine you walk into bank A that also has a Mutual Fund of their own, do you really expect them to refer to you a Mutual Fund of another AMC? Most likely NO !'

So then how are you sure that you are being recommended the most suitable schemes?

> Now that we have mentioned the term suitable above, let’s try and understand this better.

> Hypothetically let’s assume that you were recommended the schemes in your mutual fund portfolio by Mr A. but who has since been transferred, whom do you ask for advice regarding your queries now?

> In fact mutual funds isn’t even his primary job so then how would you know if you are in the right track when panic sets in during a market slump?

> There have been ample examples of banks miss-selling and miss-guiding innocent customers when it comes to Mutual Funds.

There is a very strong reason why the top 3 Fund Houses in India in terms of AUM all have their own banks as distribution partners.

Several articles in leading publications have already conducted various case studies affirming the same, examples of some are shared below

Study by Economic Times (Leading publication)

Study by Valueresearch online (Online publication)


So you have constructed your mutual fund portfolio purely on the basis of ratings of schemes you came across in some magazine or online website.

Here’s the issue with ratings though.

Most ratings on these online platforms and magazines are uniform and that is a very troublesome feature.

Let’s try and understand this better with an example.

> Say you invested in a Small Cap Fund since it was a 5 star fund whereas another Large Cap Fund was 4 star, now when the equity markets are going through a correction the Small Cap Fund has also obviously taken a beaten.

> The Fund has now been downgraded from a 5 star to a 4 star rated fund and you therefore also redeem.

> Large Caps are better equipped to handle a major correction and the 4 star rated Large Cap Fund above is now rated as 5 star. You now invest in it but after a couple of months realize the Small Cap Fund has now outperformed the Large Cap Fund and therefore you now again shift towards the Small Cap Fund.

> This chopping and changing is very detrimental to your mutual fund portfolio since you never really gain any benefit of compounding that one should ideally from long term equity investing.

> Star ratings change quarterly, unlike your goals so be careful with the importance you attach to them.

Long term equity investing in mutual funds is never a linear matter and nor should it be. Remember, if the markets do not have their fair share of ups and downs then there would be no risks attached to them and if there were no risks then where would the returns be generated from?

So keep it simple. Invest with a plan, avoid outside noise and review quarterly with your advisor.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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