Mutual Funds Down: What To Do?

A message dropped in our Belong WhatsApp community last Tuesday.

"My small cap fund is down 22% in 3 months. I invested Rs. 8 lakh. It is showing Rs. 6.2 lakh now. Should I pull out before it gets worse?"

Within an hour, 47 NRIs had replied. Some said sell. Some said hold. Some said add more.

All of them meant well. Most of them were guessing.

At Belong, we deal with this question every single week.

Sometimes daily. NRIs in the UAE, UK and US, staring at a red portfolio on their phone screen, thousands of kilometres from India, wondering if their money is disappearing.

Here is the truth. Seeing your mutual fund drop is uncomfortable. But what you do next matters far more than what the market did yesterday. The wrong reaction can cost you more than the drop itself.

This guide is the calm, step-by-step plan we share with our community members when their funds are in the red.

No panic. No jargon. Just clear thinking and practical steps.

First, Understand Why Your Fund Is Down

Before you touch anything, diagnose the problem. A fund can drop for very different reasons. Each one calls for a different response.

Reason 1: The entire market is down.

If the Nifty 50 or Sensex has fallen, your fund falling is expected. Every equity fund drops when the market drops. This is not a fund problem. It is a market cycle.

The Nifty 50 went through its longest monthly losing streak in 30 years during late 2024 to early 2025. Funds that were showing 25% returns suddenly showed 5% or even negative. That was the market, not the fund manager.

Reason 2: Your fund's category is out of favour.

Markets move in cycles. Large caps, mid caps and small caps take turns leading and lagging. If you own a small cap fund and the market is rotating into large caps, your fund will underperform. Temporarily.

Same with sectors. IT funds struggled in 2023-24 when global tech spending slowed. Infrastructure funds boomed during the same period. Categories rotate. Patience matters.

Reason 3: Your specific fund has a problem.

This is the only reason that should genuinely concern you. A fund manager change, a shift in investment strategy, consistently lagging its peers for 3+ years. These are real issues.

The difference between reason 1-2 and reason 3 is the difference between weather and climate. Weather changes daily. Climate changes slowly and permanently.

👉 Tip: Before making any decision, check if the Nifty 50 is also down. If the market dropped 15% and your fund dropped 18%, that is roughly normal. If the market is flat and your fund dropped 18%, that is a red flag worth investigating.

The 3-Question Test Before You Do Anything

When your portfolio is red, your brain screams "do something." Resist that urge for 48 hours. Then ask yourself three questions.

Question 1: Has my goal changed?

You started this SIP for your child's education in 2035. Is that goal still 2035? If yes, a drop in 2026 is irrelevant to a 2035 goal. Your time horizon has not changed. The drop is noise.

If your goal has actually changed, say you now need the money in 12 months instead of 9 years, that is a different situation. Then you should consider moving to safer instruments regardless of performance.

Question 2: Has my fund changed?

Not the NAV. The fund itself. Has the fund manager been replaced? Has the investment style drifted? Was it a pure large-cap fund that started taking mid-cap bets?

Check the fund's factsheet on the AMC website. Compare the current portfolio with what it held a year ago. If the strategy is the same and the manager is the same, a temporary drop is just that. Temporary.

Question 3: How is my fund doing compared to similar funds?

This is the most important question.

Do not compare your mid cap fund with a large cap fund. Compare it with other mid cap funds.

If your mid cap fund dropped 18% and the category average dropped 15%, the gap is only 3%. That is within normal range. But if your fund dropped 18% while peers dropped only 8%, the fund has a specific problem.

Use rolling returns over 3-year periods instead of point-to-point returns. One bad quarter can distort point-to-point numbers. Rolling returns show consistency.

👉 Tip: Performance comparison sites like Value Research and Morningstar let you compare any fund against its category average and benchmark. Spend 15 minutes doing this before making any decision. Our guide on how to check mutual fund performance walks you through the process.

The NRI Currency Trap: It Looks Worse Than It Is (Sometimes)

Here is something that trips up almost every UAE-based NRI we talk to.

Your mutual fund shows returns in Indian rupees. You think in dirhams or dollars.

The rupee has depreciated roughly 3-4% annually against the dollar over the past decade (Source: RBI).

So a fund that shows flat returns in rupees is actually showing a loss in AED terms. And a fund that dropped 10% in rupees may feel like a 13-14% drop when you mentally convert to dirhams.

This double whammy, fund drop plus currency drop, makes NRIs feel worse about their investments than domestic investors do. Same fund, same NAV, different emotional experience.

What to do about it:

Separate your analysis.

First, evaluate the fund in rupee terms against its benchmark. Is it beating the Nifty or its category? That tells you if the fund is doing its job.

Then separately assess whether you want continued rupee exposure or prefer dollar-denominated options. The currency question and the fund quality question are two different decisions.

If currency risk is your main concern, consider allocating a portion of future investments to GIFT City mutual funds that operate in USD. The Tata India Dynamic Equity Fund gives you Indian equity exposure without rupee conversion. The DSP Global Equity Fund adds global diversification in dollars.

👉 Tip: A fund dropping 10% in a market that dropped 12% actually outperformed. It protected you from 2% of the loss. Do not punish a good fund for a bad market.

Should You Stop Your SIP?

This is the most common question we get. And the answer is almost always no.

Here is why.

When your SIP runs during a market drop, you are buying more units at a lower price.

Your Rs. 10,000 monthly SIP that used to buy 100 units at NAV 100 now buys 125 units at NAV 80. When the market recovers, those extra units generate additional returns.

This is called rupee cost averaging. It is not a theory. It is maths.

During the 2020 COVID crash, Indian equity markets fell 38%. Investors who stopped their SIPs locked in losses. Investors who continued saw their cost average drop significantly.

When markets recovered within 8 months, the SIP investors came out ahead (Source: AMFI data).

In February 2025, mutual fund equity inflows dropped 26% month-on-month. NRIs pulled back exactly when they should have been buying more (Source: Mint).

The only reasons to stop a SIP:

You have lost your job or income. You need the money for an emergency. The fund itself has a structural problem (we will cover this below). You have achieved your financial goal.

Market drops are not on that list.

Read our detailed guide on SIP investing for NRIs and why continuing SIPs during drops matters.

👉 Tip: If anything, a market drop is a reason to increase your SIP, not stop it. Many seasoned investors in our community add a lumpsum top-up during corrections. They call it "buying on sale."

The Real Cost of Panic-Selling

Before you hit that redeem button, calculate what selling actually costs you. It is more than you think.

Cost 1: Exit load.

Most equity mutual funds charge a 1% exit load if you redeem within 12 months of purchase. On a Rs. 5 lakh investment, that is Rs. 5,000 gone immediately.

Cost 2: Tax on gains (even if you are overall in loss).

This one surprises people.

If you invested through SIPs over several months, some of your units may have been bought at prices lower than today's NAV, even if your overall portfolio is in the red. Those specific units may trigger a capital gain.

For NRIs, TDS (Tax Deducted at Source) is deducted at the time of redemption. Short-term capital gains on equity funds attract 20% TDS. Long-term gains above Rs. 1.25 lakh attract 12.5% TDS (Source: Income Tax Department).

You can claim a refund when filing your Indian tax return if excess TDS was deducted. But it takes time and paperwork. Better to avoid triggering it unnecessarily.

Cost 3: Lost compounding.

This is the biggest cost and the hardest to see. An investor who sold during the 2008 crash and stayed out for 2 years missed a 100%+ recovery. The lost compounding on that recovery period is money they never got back.

Read more about how short-term losses compare to long-term gains over real holding periods.

Cost 4: Reinvestment risk.

You sell. Now what? You put the money in a savings account earning 3%. Or an FD at 7%. Meanwhile, the equity fund you left recovers 25% in the next 12 months. You missed it. And now you are afraid to re-enter because the market "already went up."

This cycle, sell low, wait, miss the recovery, buy back high, is the single biggest wealth destroyer for retail investors.

👉 Tip: Before redeeming, write down what you plan to do with the money. If the answer is "just keep it safe for now," you are panic-selling, not making a strategic decision.

When You Should Actually Exit a Fund

Not every drop is temporary. Some funds genuinely deserve to be exited. Here are the legitimate red flags.

Red flag 1: Consistent underperformance for 3+ years.

One bad year can happen to any fund manager. Two bad years may be a rough patch. Three consecutive years of underperforming both the benchmark and category average? That is a pattern. Time to switch.

Check 3-year rolling returns, not just point-to-point. If the fund's rolling return is consistently below the category median, the fund manager is not adding value.

Red flag 2: Fund manager change.

The fund manager is the brain behind your investment. When they leave, the fund's character can change. If a top-performing fund gets a new manager, watch the next 6-12 months carefully. Compare the portfolio composition before and after the change.

Red flag 3: Style drift.

Your large cap fund is quietly buying mid-cap and small-cap stocks. Your debt fund is taking credit risk by investing in lower-rated bonds. This is called style drift. The fund is no longer doing what it promised.

Check the fund factsheet quarterly. If the portfolio composition has shifted significantly from its mandate, that is a valid reason to exit.

Red flag 4: The AMC itself is in trouble.

Rare, but it has happened. If the asset management company faces regulatory action, financial stress or management turmoil, consider moving your money. Your investment is held by a custodian (separate from the AMC), so your money is protected. But a stressed AMC may not attract top talent or make optimal investment decisions.

Read our guide on how to choose a fund house you can trust.

👉 Tip: Exit decisions should be based on the fund's fundamentals, not the market's mood. If the fund is doing what it promised and the category is just temporarily out of favour, patience is the smarter choice.

How to Switch Funds Without Destroying Your Portfolio

You have decided a specific fund needs to go. Good. But how you exit matters as much as whether you exit.

Step 1: Check your holding period.

If you have held equity fund units for less than 12 months, short-term capital gains tax applies at 20%. If held for more than 12 months, long-term capital gains tax is 12.5% above Rs. 1.25 lakh (Source: Income Tax Department).

If your units are close to the 12-month mark, wait. A few weeks of patience can save you 7.5% in tax difference.

Step 2: Stagger your exit.

Do not redeem everything on one day. Split redemptions across two or more financial years if possible. The Rs. 1.25 lakh LTCG exemption resets every year. You can use it twice by splitting across March and April.

Read about tax-saving strategies for NRI mutual fund investors.

Step 3: Know where the money goes next.

Before you sell, decide where you will reinvest. Have the new fund ready. Otherwise, the money sits in your bank account earning 3-4% while you "think about it" for six months.

For guidance on selecting the right replacement, read how to choose a mutual fund and our breakdown of fund categories.

Step 4: Consider the GIFT City alternative.

If you are switching anyway, this might be the right moment to move some allocation to GIFT City mutual funds. The tax benefits alone can add 2-3% annually to your effective returns.

Category III AIFs investing in Indian equities are fully exempt from Indian capital gains tax under Section 10(4D) of the Income Tax Act. For UAE-based NRIs, that is zero tax on returns. Explore options on our GIFT City AIF explorer.

The Sundaram India Mid Cap Fund at GIFT City offers mid-cap exposure. The Edelweiss Greater China Equity Fund adds geographic diversification. Both with GIFT City's tax advantages.

Rebalancing vs Panic: Know the Difference

These two look similar from the outside. Both involve selling. But they are fundamentally different.

Panic selling: Your fund dropped 15%. You feel scared. You sell everything and move to an FD.

Rebalancing: Your target allocation was 60% equity, 40% debt. After a market rally, equity became 75%. You sell some equity and buy debt to return to 60-40. Or after a crash, equity dropped to 45%. You sell some debt and buy more equity.

Rebalancing is a discipline. Panic selling is an emotion.

A good rebalancing schedule for NRIs: once a year, every January. Check your allocation. If any asset class has drifted more than 10% from your target, rebalance.

Our guide on how to build a mutual fund portfolio covers target allocation frameworks. And if you are unsure whether your mix of equity and debt is right, read our comparison guide.

👉 Tip: Write down your target allocation when you first invest. Put it in a note on your phone. When emotions run high during a drop, open that note. It will remind you what rational-you decided.

What Recovery Actually Looks Like

Every major market drop in Indian history has been followed by a recovery. Every single one.

After the 2008 crash, equity funds fell 50-55%. Within 3 years, most had recovered fully and were hitting new highs.

After the COVID crash in March 2020, markets fell 38%. Within 8 months, the Nifty was back to pre-crash levels. Within 18 months, it had crossed all-time highs.

The Nifty 50 has never delivered negative returns over any 15-year period on record (Source: NSE India).

But here is the catch. Recovery is not uniform. Large cap funds tend to recover faster because blue-chip companies are more resilient. Small cap funds may take longer but often deliver higher returns when they do recover.

The NRIs who benefit most from recoveries are the ones who stayed invested. Or better, the ones who added money during the drop.

Track the market in real time using our GIFT Nifty tracker. And compare NRI FD rates to understand the opportunity cost of sitting in cash.

The Emotional Side: Managing Fear From 6,000 km Away

Let us be honest about something.

Watching your portfolio drop when you are sitting in Dubai, 6,000 km from India, with no ability to walk into a bank branch and talk to someone face to face, is harder than doing it in Mumbai.

You cannot visit your relationship manager. You cannot attend a branch workshop. The time zones do not match. Indian customer support closes at 6 PM IST, which is 4 PM Dubai time, right when you finish work.

This isolation amplifies fear. WhatsApp forwards add to it. "Market crashing!" "NRI accounts at risk!" "Move your money NOW!" We have seen these messages. Most are noise.

Here is what actually helps.

Join a community of NRIs who invest.

Hearing from peers who have been through market drops before normalises the experience. Our WhatsApp community has thousands of NRIs who share exactly this kind of perspective.

Set a review schedule, not a monitoring habit.

Check your portfolio once a quarter. Not daily. Not weekly. Daily checking during a drop is like weighing yourself every hour during a diet. It creates anxiety without useful information.

Have a written plan.

Your investment plan should include what you will do if the market drops 10%, 20% or 30%. Decide this in advance, when you are calm. Not when your portfolio is bleeding red.

Talk to a professional.

If your portfolio is above Rs. 50 lakh and you are unsure, a one-time consultation with a SEBI-registered investment advisor is worth it. The fee is Rs. 10,000-25,000. The peace of mind is priceless.

👉 Tip: The best NRI investors we know check their portfolio quarterly, rebalance annually and ignore daily market noise entirely. Their returns are consistently better than NRIs who check daily.

A 5-Step Action Plan for This Month

If your mutual fund portfolio is in the red right now, here is exactly what to do.

Step 1: Do nothing for 48 hours.

Seriously. Sleep on it. The market will be there tomorrow. No fund will go to zero overnight. Give your rational brain time to override your emotional brain.

Step 2: Diagnose the drop.

Is the overall market down? Is your fund's category down? Or is your specific fund lagging its peers? Use Value Research or Morningstar to compare. Spend 30 minutes on this.

Step 3: Re-check your goals.

Open the note where you wrote your investment goals and timeline. Has anything changed? If your goal is still 7-10 years away, a 1-year drop is noise. If your goal is now 6 months away, that is a different conversation.

Step 4: Continue your SIP.

Unless you have lost your income or the fund has structural problems, keep the SIP running. Better yet, if you have surplus cash, consider a small lumpsum top-up. Buy more of what is cheap.

Step 5: Review in 3 months.

If underperformance persists after 3 more months (making it 6 months of lagging peers and benchmark), investigate deeper. If it continues for a year, start planning a switch. If it hits 3 years, switch without hesitation.

Download the Belong app to track your mutual fund options, compare GIFT City funds and access our NRI FD rate tool for safer alternatives.

When a Drop Is Actually an Opportunity

This is the part most articles do not talk about.

Market drops are not just something to survive. For NRIs with surplus cash, they are some of the best buying opportunities.

Warren Buffett's famous line applies here. Be greedy when others are fearful.

If you believe in India's long-term growth story, and the numbers support it, GDP growth of 6-7% projected through the decade, a rising middle class, increasing formalisation of the economy, then a 15-20% market correction is a sale. You are getting the same companies at a 15-20% discount.

Many NRIs in our community use a simple rule: for every 10% the Nifty drops from its recent high, they invest an additional lumpsum equal to one month's SIP amount. This systematic approach to buying dips removes emotion from the process.

Check the GIFT Nifty tracker to monitor real-time market levels. And if you have been sitting on cash in a UAE savings account, this might be the nudge to start investing in India.

The Bottom Line

Your mutual fund dropping in value is uncomfortable. It is supposed to be.

If investing were comfortable all the time, everyone would be wealthy. The discomfort is the price of admission to long-term wealth creation. Every NRI who has built a strong portfolio through Indian mutual funds has sat through drops, corrections and crashes.

The ones who stayed calm, stayed invested and stuck to their plan came out ahead. Every single time.

Do not let a red number on your screen override a strategy you built when you were thinking clearly.

Many NRIs in our community share this exact experience. They talk about the drops they survived and the compounding that followed. Join the conversation on our WhatsApp community.

And when you are ready to take action, whether that is continuing your SIP, switching a fund, or exploring GIFT City alternatives, the Belong app has everything you need. Compare mutual funds. Explore AIFs. Track GIFT Nifty. Check FD rates.

The market will recover. It always has. The question is whether you will still be invested when it does.

Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. The information in this article is for educational purposes and should not be considered as personal investment advice. Consult a SEBI-registered investment advisor for personalised guidance. Past performance is not indicative of future returns.