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7 Reasons why you might think your Mutual Fund has failed

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mutual fundsQuite a lot of times, we hear someone saying that mutual fund investment is useless and they have lost money in it before. You might also have an experience where your mutual fund investment has backfired big time. So, are mutual funds that bad? Should you avoid them totally? Such questions are common to most of us. I have tried to analyze reasons why few mutual funds fail to deliver.

(We Recommend you to check FundsIndia Expert Picks from Top Performing Mutual Funds)

Reason 1 – Investing based on past performance

This is the primary method for selecting a mutual fund. We look at the past performance of the fund and then choose to invest in it. Nothing wrong in it. But, how long is the past that you check? There are multiple funds which have performed for 3-6 months but failed later. Consistency is what matters here. You should ideally be checking the 3 year and 5 year performances of the fund rather than for 6 months. It would tell you if the fund was able to tide over various market cycles and interest rates. The top funds have been those which withstand the downside and then performed when the time arrived. Giving time for performance of the fund is very essential especially for equity funds which usually fail in short term but have potential to perform in the long term.

(Also see: Learn the art of picking mutual funds)

Reason 2 – High fees

Mutual fund charges fees in the form of expense ratio. It’s very important to know the expenses charged from you for managing the fund. The expense ratio is used for paying management fees, commissions, advertising expenses and other costs that the fund incurs in the process of investing. Expenses could be recurring in nature which means you will have to bear them every year till you redeem the units. The expense ratio varies from fund to fund. The usual range is 0.5-2.5%. For example, if you have invested Rs. 1,00,000 and after an year returns on the fund were 10%, your investment would grow to Rs. 1,10,000. 2% expense ratio on this would mean your investment will now become Rs. 1,07,800. If you are investing for the long term, it could be a significant factor for you since lesser amount will be invested for you. For funds which give you higher returns, it may not matter much. But, if this ratio is more for conservative funds such as debt funds which deliver returns in the range of 7-8% p.a, it should be a concern. It doesn’t mean that all funds which deliver lesser expense ratio deliver great returns and funds which charge lesser ratio have performed poorly.

Reason 3 – Markets

You may have chosen the right fund with a great track record. However, one thing which is always uncertain is the market. The market here includes stock market in case of equity funds as well as interest rate market for debt funds. If you have been into investing, you might understand this better. You must have seen recession, interest rate hikes, etc. All of these dent your mutual fund investment. Even the best of best funds have taken a hit in tough times. Some of them have recovered as there was value in those funds. One thing which you should always avoid is timing the markets. The more you try to time it, the more you lose. Of course, losing or winning in mutual funds depends on the fund managers timing the markets. It’s their job to do so. If you believe that you have got the fundamentals right in picking a fund, you should not worry about short term ups and downs of the market. Have patience.

Reason 4 – Choosing wrong type of fund

Choosing the right type of fund is as important as choosing the one with the best performance. Some define types of funds as active and passive. Some say there are equity and debt funds. These can be sub-categorized further too. Whatever be the categories and sub categories, you must be picking the fund which suits you. Just because you are conservative, there is no point investing in a short term debt fund which invests in securities of 30-90 days for your child’s education 18 years away. You should be looking at an equity fund such as large cap or small/mid cap. In the same way, you should not be investing a top mid cap fund for a goal such as buying a car after 6 months. I suppose you know this logic. But, what’s important is that you have to implement it. For this, you need to invest based on goals and not randomly.

Reason 5 – Fund Manager

This could be the significant reason behind failure of the fund. A fund manager is the backbone of a fund. He/she is responsible for the fund’s success or failure. Stock picking, timing the markets, predicting the interest rate movement, etc are usually handled by the fund manager. Usually, the best funds have been those where it had great fund managers who performed consistently for it. Prashant Jain is a great example for this. He has been with HDFC top 200 fund since 2002 and did an excellent job for the fund. Frequent change of fund managers may be a danger signal for you. Though it is difficult for a common man to monitor the fund manager’s performance, it could be worth having a glance at the past performance and credibility of the fund manager.

Reason 6 – Size of fund

Some call it AUM, some call it size. It is the amount that a fund manages. Does it matter to you how much corpus a fund manages? It may not affect you much. But, if you are looking to redeem a fund within few months of investing, a small sized fund may or may not allow you to do it. There have been cases where funds have had liquidity crunch and investors had to wait to redeem units. This may not happen in a large sized fund as lots of money flows into them.

Reason 7 – Taxability

The final reason would be taxation of your mutual fund. Let’s see how mutual funds are taxed at redemption. Equity funds held for less than 1 year before redemption are taxed at 15% but are tax free if held for more than 1 year. Debt funds held for less than 1 year are taxed as per tax slab but taxed at 10% flat or 20% with indexation if redeemed after 1 year. Also, DDT (dividend distribution tax) applies only for debt funds and not equity funds. It would affect the NAV of the fund indirectly. All these erode the returns you gain on the fund. The tax rules encourage you to invest longer in mutual funds and not trade frequently.


I have quoted some of the reasons why mutual funds usually fail to perform. There may be lot more reasons for bad performance of a mutual fund. Do think of these before investing in a mutual fund and even after investing in it. There have been multiple cases where investors did not consider these reasons and then go against mutual funds as a whole. Remember, mutual fund investments are subject to market risks.

  • BasuNivesh

    May I know the product which is cheaper to mutual funds? May I know the funds which withheld the redemption due to lower size of fund? May I know the reasons for neglecting the importance of equity as long term investment and it’s tax implication for long term? Why you not pointed only LTCG but not STCG?

    • Av Suresh

      Not all mutual funds are cheaper. Expenses vary from fund to fund. A retirement product – NPS costs cheaper than MF’s. Importance of equity could not be included in this article as this article only includes those reasons why mutual funds have failed. I have mentioned the LTCG and STCG in the final reason. For information on how to pick mutual funds, you can read this article – http://www.investmentyogi.com/art-of-picking-mutual-funds/

      • BasuNivesh

        NPS is retirement product which you can’t compare with plain equity investment. Do one only invest in equity mutual funds for retirement only? But from above post, most of points discussed seems to invalid. When we say equity then we recommend for long term investment and we need to concentrate more on LTCG rather than STCG. Picking is different story, please don’t club with this post.

        • Av Suresh

          Yes, NPS, FD, RD, Mutual funds are totally different products. But, my answer was only for your question on cheaper product compared to mutual funds. If you have read it till end, I mentioned that there could be other reasons for mutual fund failure. All points cannot be mentioned in a single article. Hence, we divide articles based on concept. The art of picking mutual funds also talks about how and why to choose mutual funds. We also have articles on equity mutual fund investments, how to use mutual funds for achieving goals, top ELSS funds to invest, etc.You can go through them too.

          • BasuNivesh

            When you said about mutual fund expenses then let me know the other best cheapest product than mutual funds please.
            Also the points mentioned in above posts are hypothetical but not realistic like fund liquidation, taxation, expenses or AUM of fund.
            Let us readers decide how they can interpret your post :)

          • Av Suresh

            PPF is a product which gives EEE tax benefit and also doesnt have any expenses. I also mentioned NPS as a cheaper product in terms of expenses. As I mentioned, these are the points that investors should look forward to while investing in mutual funds. Some of these may not be direct reasons for mutual fund failure, but investors might back off from MF’s by considering it as failure.

          • BasuNivesh

            PPF does not have any expenses? Oh….then what about the management and investment expenses of PPF? Who will bear those expenses? If PPF is not disclosing the expenses part then it does not mean that any PPF product not involves any expenses.

          • Av Suresh

            Can you share the expenses of PPF with us? Because I believe as an Investor, every thing that you invest in PPF is treated as investment unlike mutual funds. From the consumers point of view, interest rate of 8.7% p.a from PPF is without any deduction of expenses. You can share your views on this.

          • BasuNivesh


            Please do research on each product whether if product not declaring any expenses means how they are managing. If not found the then you can file RTI. Think that you are collecting authority of PPF fund and you need to give 8.7% return every year (which again not fixed for future and will change every year), then how you give that return without investing somewhere. I hope logic is clear for you :)

          • Av Suresh

            Well, if you have done research on it, please share it with us. You can also file an RTI if you are doing an article on it. We will consider it in the future. According to our understanding, a user gets returns of 8.7% p.a without deducting any expenses. Other expenses such as commissions and other charges will not be the headache of investors. Also, PPF does not have a fund manager to manage it. These are guaranteed returns for the year based on government bond rates and vary every year. Anways, these are our views. We respect your views on this too.

          • BasuNivesh

            If charges are not the headache of investors then why you raised fund expenses issue? Sure will give you the information of the products where expenses are not declared like Endowment Plans (worst than ULIPs when we consider expenses),PPF, FDs or any other product where you are not worry about expenses or product itself not disclosing it.

          • Av Suresh

            Yes, charges are definitely not headache of investors when they do not pay them. I had mentioned them only for MF’s where investors have to bear the charges. Sure, please do share with us the charges of PPF and FD’s post returns declared.

          • BasuNivesh

            Wow great learning “charges are definitely not headache of investors when they do not pay them”, this is the reason today Endowment Plans are sold like hot cake as investors not paying expenses (which are around 40% in first year). Simply because investor is not paying charges from his pocket :)

          • BasuNivesh

            I don’t know my last comment is not visible on your site :) Please have a look at attached image. Is it the same technical glitch which few days back happened in Loksabha??

    • Kalyan

      Quantum Fund is the cheapest as they are direct funds. Even in a mutual fund, you can subscribe directly which would be cheaper.

  • rajiv ahuja

    Valid points. I am subscribed to your blog but I am not getting it in my e-mail.Kindly see to it. My e-mail is rajivahuja06@gmail.com

  • Pragnesh

    Before you put such details, you should have knowledge what you talking about. PPF & MF are completely a different category and you can’t compare apple with orange. Both have adversities & advantages over other…Just update your knowledge. Let me know which product comes without expense. expense ratio might differ, but it all depends on fund company and fund quality manager. I am not expecting such kind of blog from investmentyogi advisor. disappointed…

    • Av Suresh

      Pragnesh, I totally agree with you that PPF and MF are different products. That’s the reason why I did not compare them anywhere in this article. All I have conveyed in this article is that MF investors should check the expense ratio of the fund before choosing it. You cannot ignore a mutual fund with higher expense ratio. I have also mentioned that it varies from fund to fund.

      • Pragnesh

        all right then.

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