7 Reasons Behind Your Mutual Funds Poor Performance and How to Overcome Them

Have you ever heard anyone say his or her mutual funds proved worthless, or he/she has lost money in the same?

One might also experience times when their investment in a mutual fund was a major disappointment.

Pertaining to these scenarios, we may consider investing in Mutual Funds a poor-quality option, and may even think of avoiding the same entirely.

Why mutual funds are bad is a common concern when investors face negative returns or poor fund choices.

The disadvantages of mutual funds often include high expense ratios, underperformance, or misaligned fund selection with investor goals.

What are the reasons for the slow growth of Mutual Funds in India?

Why Some Mutual Funds are not performing well?

Are Mutual Funds failing investors’ expectations?

Such negative responses to Mutual Funds are common among the majority of us.

What is the reason behind the same?

Let us try to understand the whole idea of why Mutual Funds fail.

Table of Contents

1. Considering Investment based on their Past Performance
2. The Expenses
3. Market Uncertainty
4. The Fund Managers
5. The Fund Type
6. The Fund Size
7. The Taxation of Your Mutual Fund

1. Considering investment based on their past performance:

This is one of the primary methods of selection and avoids investing in a Mutual Fund which has a very slow growth.

One of the major reasons for the slow growth of mutual funds in India is that many investors rely solely on past short-term returns without considering consistency or market cycles.

There is nothing wrong in judging mutual funds on basis of the past performance. However, the question arises about how long will be the past that you are going to check.

Let us quote an example here. There may be funds that performed well for the last 3-6 months but had failed earlier. It is all about consistency that matters here to find the underperforming Mutual Fund.

Underperforming mutual funds are often the result of short-term market noise or changes in fund management that investors fail to track.

Therefore, other than checking the last 6 months’ performance, one should look at the fund’s 3-year or 5-year action.

This will tell if the fund was able to sail well through the various market cycles and interest rates or if it is a consistently underperforming Mutual Fund.

The performance of mutual funds in India is best judged over a longer period, not just recent returns.

The market performance of Mutual Funds can be judged on the basis of endurance during downtimes and outperformance during the right times, which are the characteristics of the top funds.

Especially for equity funds, it is very significant to give sufficient time for the fund to perform. This might not show results in the short term, but in the long term, it has a lot of potential.

Also, watch the video here!

2. The Expenses

Mutual funds charge their fee based on the expense ratio and one needs to have an understanding about the same.

High expense ratios can lead to poor performing mutual funds in India, especially when the returns are already modest.

This is one of the disadvantages of mutual funds that directly impacts investor wealth accumulation.

Expenses could be repetitive, meaning one has to bear the same every time until the redemption of the units.

The expense ratio includes payment of management fees, commissions, expenses on advertising, and others incurred by the fund during the investment process.

This ratio is a variant for every fund, with a normal range from 0.5% to 2.5%. It may not matter much for funds that give you higher returns.

Mutual fund performance cannot be solely correlated with fees, but unnecessary charges certainly eat into your gains.

A high expense ratio may be a concern for conservative funds (such as debt funds), which deliver returns ranging from 7-8 % per annum.

However, it does not at all means that funds with a lesser expense ratio will always deliver great returns, and funds charging a higher ratio will show poor performance.

There is no clear correlation between funds’ success or failure with the high or low expense ratio.

3. Market Uncertainty

Even though one may have chosen a fund with a great past record, however, one cannot be always certain about the markets and the performance of Mutual Funds.

Here, markets refer to the stock market for equity funds and interest rate markets for debt funds.

Why are mutual funds going down in India?

One key reason is the unpredictable nature of economic cycles and interest rate trends.

Another problem that Mutual Funds face in India is, economic slowdown and recession.

For example, market fluctuations causing a recession, hikes in interest rates, etc. affect your mutual fund investment as well. In these tough times, even the best funds take a hit.

Do mutual funds give negative returns? Yes, in turbulent market phases, even diversified funds can temporarily go negative.

What to do if the Mutual Fund is not performing?

One thing to always avoid doing is timing the markets because the more one tries doing it, the more he is at a chance of losing. It is the job of the fund managers to time the markets.

Therefore, if you possess the basic knowledge of picking the right fund, then there is not much worry about the market’s uncertain ups and downs.

All you need to have is just patience even if there is a slow growth of Mutual Funds.

4. The Fund Managers

A fund manager could be a fund’s backbone, as well as a critical reason behind its failure. He is the person, who handles the market timing, stock picking, prediction of the interest rate movements, etc.

The funds, the Mutual Funds with consistently performing fund managers, are normally the best.

The performance of mutual fund in India is closely tied to the expertise and consistency of its fund manager.

Fund managers that are changing very often could also prove to be a dangerous signal for the extremely slow growth in the Mutual Fund scheme.

Does past performance matter in investment manager selection?

Even though it may be difficult to monitor a fund manager’s performance, still it is worth having a look at his past performance and credibility to avoid the slow growth in mutual funds.

5. The Fund Type

Selecting the right type of fund has a very important role to play. It is as important as choosing the one with the best accomplishments. This will help you avoid the slow growth in Mutual Funds

One may classify funds as active and passive, or equity and debt.

Growth mutual funds typically aim for capital appreciation, but may underperform during market downturns.

They are suitable for long-term goals where volatility is acceptable.

No matter what the categories are, you should go for the one that suits you most.

We can further break the categories into their subcategories based on the performance of Mutual Funds.

You should make the selection of your fund type based on logical reasoning. For example, investing in a short-term fund may prove to be meaningless at times.

Therefore, it is always beneficial to make investments based on certain goals, not haphazardly.

More important is how you implement the link between your reasoning and your goal in selecting the most suitable fund type.

6. The Fund Size

You may call it the AUM or simply the size. The fund size is the total corpus that the fund can manage. It may not matter to the investors much.

However, if you are looking forward to redeeming your fund within a few months of investment, a small-size fund may prevent you from doing that.

Poor fund liquidity and limited AUM can restrict redemption during volatile periods.

This often leads to dissatisfaction and a sense of mutual funds not working as expected.

There are cases in which the funds have had liquidity crunches. In such conditions, the investors have to wait for the redemption of their units.

This condition does not usually arise in a fund of large size, with lots of money flowing into the same.

7. The Taxation of Your Mutual Fund

The tax imposed for Equity Funds, held for less than a year before redemption, is 15%.

Whereas, the same if held for more than a year, is taxed as a long-term capital gain at redemption and taxed at 10%.

Taxation on mutual fund returns can significantly impact your net gains, especially if not planned properly.

Being unaware of tax rules is one of the overlooked mutual fund disadvantages.

In the case of debt funds, the tax amount calculation is as per the tax slab, whenever the investor redeems the funds.

Dividends from equity and debt funds are added to the income of the investor and taxed at his income tax slab rate.

The imposition of tax rules is a motivation factor to invest in mutual funds for a longer period, and not indulge in frequent trading.

These above-mentioned reasons were just a few of the many, behind the normal failure and bad performance of the mutual funds.

Therefore, considering these before and even after making a mutual fund investment may help you make better decisions.

Always remember, mutual fund investments are subject to market risks. Therefore, think and read the offer documents carefully before investing, as said in its disclaimer.

Why are my Mutual Funds doing so poorly? How to avoid investing in Poor Performing Mutual Funds?

One easy way is to understand the mutual fund concepts better. Let us understand the mutual fund concepts better.

Understand What Mutual Funds Are and How They Work

Mutual funds are one of the best ways to participate in wealth creation through investing in stock markets while reducing the risk that is associated with investing directly in the public stock markets.

As a result, no matter what risk profile you have as an investor fit in mutual funds and should be part of your investment portfolio.

However, a lot of people are wary of investing in mutual funds due to a lack of information about how mutual funds work and what they are.

They may have questions like: “Are mutual funds really safe?”, “Can I lose money in mutual funds?” or “Are mutual funds better than stocks?” — all of which stem from incomplete understanding.

While mutual funds work similarly to how stock markets work in terms of the underlying assets, they are quite different in how the investments work to who manages the investment as well as the underlying asset classes mutual funds invest in.

What are mutual funds: 

Unlike specific asset classes such as public stocks, bonds, and commodities mutual funds can be considered as a bucket of different asset classes comprising different asset classes.

This means that when you invest in a mutual fund, you are essentially buying a portion of all the asset classes that the said mutual fund invests in.

This helps distribute your risk to a certain extent since a decline in one asset class might be offset by another asset class that comprises the portfolio of the mutual fund.

This is why diversified mutual funds are often recommended for first-time investors or those seeking balanced risk exposure.

Who manages the mutual fund investment?

While investments in stock markets are largely managed by individuals or wealth managers (for high-net-worth individuals),

Mutual fund Investments are managed by seasoned portfolio managers who manage the investment strategy for the entire portfolio on behalf of all mutual fund investors.

This process makes mutual funds a great investment vehicle for individuals who are either new to stock markets or do not have the know-how required to effectively manage their investments.

In this sense, a mutual fund manager acts like a pilot navigating you through financial turbulence.

Understanding the value of a mutual fund: 

The growth of Mutual Funds in India is massive. In the case of stock market investments, every public stock has a market traded value on its own which is essentially the currency of the stock.

In the case of mutual funds, the underlying currency for mutual funds is known as Net Asset Value (NAV) which is essentially calculated based on the value of the entire portfolio of the mutual fund at the time of the closing of public markets.

NAV helps you track your fund’s performance, just as a stock price reflects the value of an individual company.

Fees & Charges associated with Mutual Funds:

Similar to how Demat accounts charge you a fee for buying and selling stock, there are fees associated with investing in mutual funds as well.

While the specifics differ by the type of mutual fund you invest in, some of the fees involved are:

• Expense ratio (a % of the investment charged as management fees).
• Exit Load (a % of the investment paid when you sell the mutual fund).

Depending on the type of the fund, there are also capital gains taxes applicable when you redeem the investment. 

Being unaware of these charges is one of the common mistakes that lead to poor mutual fund performance.

Types of Mutual Funds: 

Since mutual funds take a portfolio approach to investing across asset classes, there are various types of mutual funds depending on the nature of the investment portfolio.

You can choose from:

• Equity mutual funds for long-term capital growth
• Debt mutual funds for conservative income
• Hybrid funds for a mix of both

This allows you to invest in a mutual fund that suits your risk profile or wealth creation goals and avoid mutual funds not performing well due to misalignment with your objectives.

Risks: 

Are Mutual Funds failing investors’ expectations?

Despite the obvious benefits of mutual funds, there are risks associated with investing in mutual funds also like most other investment vehicles.

Another important problem of mutual funds in India is that,

Since the underlying assets a mutual fund invests in carry market risk, an ill-managed mutual fund or an external market condition could severely impact the value of your mutual fund and result in your Mutual Fund not performing well.

Can mutual funds give negative returns?

Yes, especially in volatile market conditions or economic downturns. This is why it’s essential to align your mutual fund choice with your time horizon and risk appetite.

Do you think half-baked insights on investing in Mutual Funds on social media platforms like Quora, Facebook, Twitter, etc. will help you in the long run?

Please consult a Professional Financial Planner who has expertise in handling Mutual Funds.

To have long-term success with your investments, having a well-drafted financial plan will be of immense help.

To create a sound financial plan, I strongly recommend you take advantage of the below 30 Minute Free Financial Plan Consultation.