Can Mutual Funds Give Negative Returns?

Investors choose mutual funds to achieve their mid to long-range goals such as homeownership, college education, and comfortable retirement. Mutual funds are broadly diversified among stocks and bonds to create a balanced portfolio that minimizes risk. But can mutual funds give negative returns?

Mutual funds can give negative returns, even though the risk is low. When they do, consider that an opportunity to buy more shares while the prices are down. When the market rebounds, the rate of return will be higher and you have the potential to earn more money.

A negative return for mutual fund investors means that stocks and bonds purchased by the fund lost value over time. Similarly, a gain here would, of course, mean they grew in value. There is always volatility in the markets up and down, and research and patience are essential to long-term goal setting. Keep reading to learn more!

In a Bear Market, Mutual Funds Can Give Negative Returns

The value of mutual funds can change day-to-day. 

The formula for figuring the NAV or Net Asset Value of a mutual fund is the value of assets minus liabilities, divided by the number of shares. Each mutual fund determines the NAV daily after the stock market closes, which may go up, down, or hold steady. 

Some investments within the fund may show a negative return from time to time. However, those losses are balanced by the stocks and bonds that perform well. The fund then stays profitable. 

History shows that significant stock market downturns occur every two or three years. Some are localized, and some are global. 

If the stock market declines by 20% or more, it’s declared A Bear Market. You may see negative returns but be patient, as Bear markets recover and often to higher levels for those who wait. 

It’s an excellent time to buy more shares while prices are down. 

Good Investment Strategies Minimize Negative Mutual Fund Returns

Global and localized mutual fund downturns that can result in negative returns will occur from time to time.

Recovery isn’t guaranteed, but most investors who stay put will see positive returns again. You can, however, lose your investment and your principal in a mismanaged fund, which can be due to fraud, high fees, and just poor strategy.

We have little control over world events that add volatility to investment returns. 

Mutual Funds are already regulated and low risk. The responsibility then falls on you to seek out the significant investment companies whose mutual funds suit your goals, along with reputable fund managers with proven investment strategies. 

Investing in Mutual Funds is easy, low risk, and profitable if you select the right fund to suit your goals and risk tolerance. 

But first, you need to take a little time and evaluate the hundreds of funds on offer. You can simplify the process by choosing a high-profile investment brokerage company with many mutual funds on offer.

A consultation with the company’s investment counselors can help you narrow down the managed fund that suits your goals. 

Once you’ve selected the fund that appeals to your goals, risk tolerance, time frame, and investing budget, you’ll need to choose systematic investment payments (SIP), so that your investment contribution is electronically transferred to the fund.

Your Fund Manager Strategizes To Avoid Negative Returns 

You want your money to earn more than it would in an automatic savings account, and you are willing to assume the slight risk associated with higher returns. In doing so, you place your trust in the fund managers. 

When investors make money, fund managers make money, so there is no question they have your best interest in mind. Their skill at reading the markets, diversifying investments, and balancing them results in long-term profits for fund investors. 

Mutual Fund Returns – Fee Deduction = Negative Returns

Mutual funds charge fees that are paid out of gross returns, which are paid regardless if it’s an upmarket or a down market. When investigating and selecting a fund, search the prospectus for the fee schedule and rate.

Let’s take a closer look at how this works:

• Your fund manager is paid a management fee for services, which is the most significant fee.
• Front-end fees might be charged when stocks are purchased based on the buy price, while back-end fees can be charged when stocks are sold, based on price.
• A 12B-1 fee is a controversial fee charged by some mutual funds annually to promote the fund to new investors. The fee is controversial because most investors believe that a well-managed fund does not need to solicit more investors. About 70% of funds charge this fee, but 30% don’t.
• There may be office, accounting, or research fees charged.
• Your gains are taxable.
• A gross return could quickly turn into a negative return after deducting fees.

Mutual Funds must disclose all fees in the prospectus. Read and analyze it carefully so you know what expenses to expect. 

The Securities and Exchange Commission oversees and sets a cap on mutual fund fees. 

Diversity Lowers the Risk of Negative Returns From Mutual Funds

For life-changing returns on investments, you have to take life-changing risks. From time to time, investors with a high-risk tolerance enjoy incredibly high returns. What they do next with that significant return on their investment tells the tale. 

At the end of five years, has that investor continued to build wealth with that considerable return? Or did he reinvest it all in a poor choice, and nobody has heard from him since? 

When you invest individually, it’s all your money on the line. Some people thrive on risk and love skating on thin ice, but you don’t have to be that person to create wealth and security. 

An Over-Diversified Mutual Fund Could Result in Negative Returns

If diversity lowers the risk of negative returns for mutual funds, over-diversification reduces returns without lowering the risk. Your fund managers cannot monitor the performance of scores of individual investments in a mutual fund. 

Diversification does not just mean owning a lot of different investments. It means that you can invest in various industries but not necessarily every sector. As an investor, you may have preferences regarding the sectors you want to put your money in. 

Let your fund manager know that. 

Choose low-risk, mid to long-range mutual funds with a management strategy designed to include a few of the sectors that you are particularly interested in. Your fund manager can help you weed out those sectors you are intellectually or morally opposed to. 

The personalized investment portfolio reinforces your commitment to consistent investing. 

Your fund manager may select 20 stocks for your fund that he or she believes, based on research and experience, will do well over the next five years. These are called high conviction funds and will most likely be blue-chip stocks.

The number is few, but the industries they represent are broadly diversified. However, because they are few, your portfolio will not be over-diversified, resulting in mutual funds giving negative returns. 

Conclusion

Consistently invest in a top-rated mutual fund managed by experienced people, and you will meet your financial goals unless your goal is to get rich quickly. 

The overall risk of investing in mutual funds is small and you won’t have nightmares that you gambled and lost it all. You will feel confident and in control of your financial future.

A Mutual Fund Negative Return is just a blip for savvy investors taking a long view. Set up a SIP with your mutual fund and let consistent and automated payments do the job of working your plan without interruptions. 

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