Are Negative Returns Possible with Mutual Funds?


Right, so I’m sure that you have heard of the benefits of investing in a mutual fund especially if you are investing in one over the long term. The low-risk that most mutual funds offer is very enticing to smart investors. However, there will always be the question of whether or not you can get negative returns specifically from mutual funds.

The only ways you can lose money with a reputable mutual fund is if the market crashes and you decide to sell. This is often a decision brought on by panic and that is why you should never end make decisions based on emotion especially when it comes to investing. The other way is if the fund goes into liquidation after a large loss.

There is a lot more to discuss when it comes to negative returns and mutual funds. In this article, we are going to talk about how you can prevent negative returns. After that, I want to discuss how safe mutual funds really are and what happens when the market crashes. So, for everything you need to know, keep reading.

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Can You Lose Money With Mutual Funds?

When it comes to any form of investing you are taking a risk. The risk is that you can lose some if not all of your money and the same is true when it comes to mutual funds.

Just because you are not directly investing in the stock market when you invest in mutual funds, you are still doing so, just indirectly. Remember though, most mutual funds hold stocks along with other investments in their diverse portfolios. This means that you are still at the mercy of a volatile market.

So, if the securities and stocks that the mutual fund owns lose value, your money loses value as well. However, with all of that being said, it is important to remember that after a bear market, a bull market will follow.

Over the course of 100 years, there have been about 60 bear markets depending on your opinion of what a bear market is. However the S&P500 and Dow Jones Industrial average have seen massive returns.

Basically, even though the stock market starts to drop, it will always pick up again. You just need to hope that the investments that the mutual fund has made also start to rise in the bull market.

How To Prevent Negative Returns With Mutual Funds?

So, we have already established that investing in mutual funds can be risky even though in terms of investments, it is one of the least risky ways to invest your money. Let’s take a look at a way that you can try and prevent taking a loss when investing in mutual funds.

You need to have discipline mentally and emotionally. One of the quickest ways to lose money when investing is to be emotional and to base your decisions on those emotions. Having a structured strategy is the safest way to prevent emotional investing.

When a market starts to crash, the value of the mutual fund will also decline as well as the shares that you hold within the fund. It is at this point that most investors who are not experienced will sell their shares at a loss so that they don’t experience a further decline. They are missing the point.

Even though you will only lose a small amount of your money… If you keep repeating these practices you can think of it as throwing money away. Eventually, you could be left with nothing.

So, the best way to not lose money when investing in mutual funds is to invest in mutual funds with a long-term mentality. If the stock market drops, just be patient, do not sell, and wait for those shares to rise again.

How Safe Is Your Money In Mutual Funds?

In order to determine how safe mutual funds are, we should compare it to investing individually. Doing this is the best way that I can think of to explain how safe mutual funds are. However, if you are in a hurry I can say that mutual funds are one of the safest ways of investing your money.

When you invest on the stock market by yourself, you get a stockbroker, you give them a cash advance and then you invest accordingly. The amount of stock that you can buy will be limited. This is true unless of course, you start investing with a large starting capital in which case you can invest in a variety of different stocks to create a diverse portfolio.

We have written a recent article about portfolio diversity which I highly recommend you give a good read after reading this article. For now, let’s get back to the safety of mutual funds.

Because you have a limited amount of stocks, you rely solely on those stocks to perform well whereas a mutual fund does not have that problem because their portfolios are so diverse.

This diversity means that if one stock is underperforming, another stock will be performing well. I am going to assume that you are only going to invest in reputable mutual funds which means they have a good fund manager who can predict and react depending on how their stock is doing.

A mutual fund is a low-risk and low-yield investment. It is also a long-term investment.

What Happens To Mutual Funds If The Market Crashes?

Before we dig into the section we need to understand that a mutual fund does not only invest in the stock market. In fact, they can invest in a lot of different areas such as property, short-term debt, bonds, and stocks. With all of that in mind, let’s carry on with this section.

If the market sectors start to crash, a good fund manager will have a plan in place. However, sometimes the market crashes as a whole.

When the market takes a hit, a mutual fund will simply hope that the investors do not decide to sell their stock. This is because it is important to remember as we have already discussed, after a bear market, a bull market will occur.

The fund manager will want to retain as much capital as possible. This is the quickest way for them to become profitable again.

While the portfolio of a mutual fund might decline during a market crash, it will certainly rise again. Because of its portfolio diversity and the wealth of funds that a reputable mutual fund has, the stock market dropping becomes a game of patience and waiting for it to go back up again.

With that said, you know that the manager will do their best to minimize any losses.

It is so important that you as an investor do not panic and decide to sell your mutual funds. Yes, by Law a mutual fund must allow you to redeem your units so they will do so. If you do this, not only will the mutual fund take a hit but you will lose money as well.

Can my Dividends Fluctuate when a Mutual Fund Declines in Value?

Some mutual funds pay out dividends. They can do so every quarter, bi-yearly, or even once a year. If the securities that a mutual fund owns are doing well then your dividends should go up. However, if the market is in a bad place then you can expect to receive fewer dividends than you would otherwise.

So, yes your dividends can fluctuate when you invest in mutual funds. It is always good if you do your research on the current state of the market when it comes time to receive your funds and that way you can work out whether or not you are going to have a good year or not.

Fund managers want to reward investors as much as possible. But when the fund is running at a loss, it can be hard to provide dividend payments.

The fund wants to find the quickest way back to full health, one of the ways to encourage growth is by retaining cash and not paying dividends, so investors suffer in the short- term, for long-term health.

Conclusion

At the end of the day, it all comes down to you. Yes, the market is unpredictable. One thing that we do know is when the market drops it rises again and I cannot stress this enough, do not panic when it crashes. With this mentality, you should not lose money when investing in mutual funds.

Chris Race

I am an accountant from the U.K. specialising in Management Accounting, Personal & Business Tax, Financial Analysis, and Wealth Management. My passion for learning is what lead me to creating this blog. Stock market investing has always been a interest of mine, and since I was 18 years old... This interest has become a source of income for me and my family.

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