Many Indian investors have recently noticed that the value of their mutual fund investments—especially equity mutual funds—has dropped. Seeing your portfolio in red can be stressful, but it is important to understand why mutual funds go down and whether it should be a cause for concern. Mutual funds are market-linked products, and their performance is influenced by several economic and global factors. This article explains in simple terms why mutual funds go down, how these factors work, and what investors should do during such periods.
1. Market Volatility Affects Mutual Fund Prices
Mutual funds—especially equity funds—invest in the stock market. When stock prices fall, the NAV (Net Asset Value) of mutual fund units also decreases. Market volatility is normal and can happen due to:
- Quarterly results of companies
- Sudden buying or selling pressure
- Investors reacting emotionally to news
- Unexpected market events
Short-term volatility does not decide long-term returns, but it does impact mutual fund performance temporarily.
2. Global Economic Slowdowns
Indian markets are deeply connected to global markets. If major economies face slowdowns, inflation, or political uncertainty, Indian markets also react negatively.
Common global reasons include:
- Slowdown in the US or China
- Geopolitical tensions (wars, sanctions, trade restrictions)
- Global recession fears
- Fall in foreign investment
When foreign investors withdraw money from Indian markets, mutual fund NAVs start falling.
3. Rising Interest Rates and Inflation
When inflation rises, central banks like RBI increase interest rates. Higher interest rates can negatively affect:
Equity Mutual Funds
- Borrowing becomes expensive for companies
- Profitability goes down
- Stock prices fall
Debt Mutual Funds
- Bond prices fall when interest rates rise
- This reduces NAV in the short term
Inflation also reduces purchasing power, affecting market sentiment.
4. Poor Performance of Major Sectors
Mutual funds diversify across various sectors such as:
- Banking
- IT
- Pharma
- FMCG
- Infrastructure
If one or more major sectors underperform, the entire fund may decline.
For example:
- If IT stocks fall due to poor global demand
- If banking stocks fall due to bad loans
- If manufacturing slows down
These sector-specific issues directly impact mutual funds that are heavily invested in those stocks.
5. Corrections After Long Market Rally
Markets cannot keep rising continuously. After a long period of growth, the market naturally enters a correction phase.
A correction is healthy because it:
- Removes overpriced stocks
- Balances valuations
- Prepares the market for a stronger next rally
Mutual fund declines during corrections are normal and usually temporary.
6. Government Policies and Budget Announcements
Policy changes can affect investor sentiment. Some examples:
- Changes in tax rules
- Higher GST on certain industries
- Budget announcements affecting business costs
- New regulations for banks or NBFCs
Even if policies are good long-term, markets may react negatively in the short term.
7. Redemption Pressure from Investors
Sometimes, investors panic and start withdrawing from mutual funds.
When many people redeem at once:
- Fund managers may need to sell holdings
- This selling increases market pressure
- NAV may decline further
This chain reaction often happens due to fear, not fundamentals.
Should You Worry When Mutual Funds Go Down?
Short-term mutual fund decline is normal. What matters is why they are going down and your investment horizon.
You should not worry if:
- You are investing for long-term goals
- Your SIPs are continuing
- Your fund’s fundamentals are strong
- The decline is due to temporary market events
In fact, SIP investors benefit from market dips because they buy more units at lower prices.
What Should Investors Do During This Time?
1. Stay Calm and Avoid Panic Selling
Selling during a downturn locks in losses.
2. Continue Your SIP
SIP works best during market dips—more units at cheaper prices.
3. Review, Don’t React
Check if your fund is underperforming compared to its category, not just the market.
4. Focus on Long-Term Goals
Mutual funds need time—5, 10, or 15 years—to deliver solid returns.
5. Rebalance If Needed
If a particular fund consistently underperforms for 2–3 years, consult a financial advisor.
Final Thoughts
Mutual funds go down mainly due to market volatility, economic changes, global uncertainty, inflation, and sector-level issues. These are all part of normal market cycles. Successful investors understand that declines are temporary, while long-term wealth creation through mutual funds is steady and rewarding. Instead of worrying, stay disciplined, continue SIPs, and trust the power of long-term investing.