Last month, during a market correction, we received dozens of messages in our Belong WhatsApp community asking variations of this exact question.
One member from Dubai wrote: "My portfolio is down 15%. Should I pull everything out before I lose it all?"
The fear is real. And it's completely understandable.
But here's what we tell every nervous investor: losing some money temporarily is common.
Losing all your money in a diversified mutual fund? That's a scenario so rare it borders on theoretical.
This article breaks down when and why mutual funds lose value, what history tells us about recovery, and what safeguards protect your capital. No sugarcoating, no false promises.
Just facts to help you sleep better at night.
Yes, Mutual Funds Can Lose Money. But Here's the Context.
Yes, you can lose money in a mutual fund. Mutual funds come with a few risks. If the securities or assets held by a fund lose their value, you may lose some or all of your money invested in that mutual fund.
That last part sounds scary. Let's put it in perspective.
For you to lose "all" your money, every single company the fund invests in would need to go bankrupt simultaneously.
A typical equity mutual fund holds 40-60 different stocks across multiple sectors. The probability of all of them becoming worthless together is essentially zero.
What actually happens? Temporary declines. Market corrections where your portfolio shows red for weeks or months.
These are normal and, historically, always recover.
👉 Tip: The value you see in your app is "notional." You only lock in a loss when you actually sell. Patience often converts red portfolios to green ones.
What History Tells Us About Market Crashes and Recovery
India has witnessed several major market crashes. Each time, investors feared the worst. Each time, markets recovered.
2008 Global Financial Crisis
The Indian stock market crashed by more than 50%. The global financial crisis in 2008 was the one with the steepest fall and it took 2 years for the equity markets to recover.
By November 2010, the Sensex had regained the 21,000 mark, representing a 162% gain from the low of 8,000.
COVID-19 Crash (2020)
In March 2020, the Sensex plunged from 41,000 to around 25,981 as global markets reacted to the economic shutdowns.
However, recovery came quickly with the help of the injection of liquidity as well as lowering interest rates.
By November 2020, the Sensex had climbed back to around 41,000, marking an 8-month recovery.
By September 2021, it scaled past 60,000, representing over a 130% gain from the March 2020 low.
1992 Harshad Mehta Scam
Markets crashed over 50%. The recovery took almost four years. By 1996, the Sensex crossed the 4,600 mark again, representing an 82% gain from the bottom.
The pattern is consistent. Crashes happen. Recovery follows. The key variable is time.
The Critical Difference: Notional Loss vs Actual Loss
When mutual fund investors seek higher returns, they invest in equity mutual funds. Since they are market-linked, these funds get affected when the market goes down.
But here's what matters: NAV reductions represent notional losses unless you redeem your units.
Think of it this way. Your home's value fluctuates with real estate markets.
If property prices drop 20%, you haven't lost 20% of your money unless you sell the house. The same applies to mutual funds.
If you sell during a downturn, you convert notional losses into actual ones. This is why panic selling during corrections is the single biggest wealth destroyer.
👉 Tip: Before making any redemption decision, ask yourself: "Has my financial goal changed, or just the market?" If only the market changed, staying invested is usually the right choice.
Why Diversified Funds Almost Never Hit Zero
A mutual fund never experiences a permanent drawdown and it does eventually recover but at times if you have invested in a bad stock, you can incur a permanent drawdown, i.e., the stock may never recover (examples being Kingfisher Airlines, Jet Airways, etc.).
This is the crucial distinction between mutual funds and individual stocks.
When Jet Airways collapsed, shareholders lost everything.
But investors in diversified equity funds that held some Jet Airways shares lost only a tiny fraction since that stock was one of 50+ holdings.
Diversification is your insurance against total loss.
Even if 2-3 companies in a fund's portfolio fail completely, the remaining 47 companies continue generating value.
For NRIs wanting exposure to Indian markets without single-stock risk, mutual funds remain the safer path. Explore how diversification works in our guide on how to build a mutual fund portfolio.
What Happens If a Mutual Fund Company Shuts Down?
This is a fear we hear often. "What if the AMC goes bankrupt? Do I lose my money?"
The answer provides significant comfort.
Yes, mutual fund investors are protected even if an AMC goes bankrupt. That's because the fund house does not hold the money.
The money is held by an independent trustee. The guardians and executors are SEBI-registered. They supervise fund resources and ensure the investors are protected.
SEBI has defined a framework to handle fund house closures:
If the fund is closed, the assets are sold, and the proceeds are given back to the investors proportionally. The trustees must give investors a 30-day notice with the choice to exit without an exit load.
Your money sits in a separate trust structure, not in the AMC's corporate accounts. Even if the entire fund house collapses, your investment remains ring-fenced.
Low-Risk Funds That Rarely Show Losses
Not all mutual funds carry the same risk. If preserving capital matters more than maximising returns, low-risk options exist.
Overnight Funds
Invest in securities maturing the next day. Almost impossible to lose money here. Returns hover around 6%, but volatility is near zero.
Liquid Funds
Invest in instruments maturing within 91 days. Slightly better returns than overnight funds with minimal risk.
Arbitrage Funds
These exploit price differences between cash and derivatives markets. Classified as equity for tax purposes but behave like debt funds in terms of stability. Typical returns range from 6.5-7.5% with very low volatility.
For NRIs prioritising safety, explore our guide on safe investment options and compare with NRI FD rates.
👉 Tip: Low-risk funds won't beat inflation significantly over long periods. Use them for short-term goals or emergency funds, not long-term wealth building.
When Can You Actually Lose Significant Money?
While total loss is nearly impossible, substantial temporary losses do occur. Understanding when helps you prepare mentally.
Small-Cap and Mid-Cap Funds
These invest in smaller companies with higher growth potential but also higher volatility. During the recent market correction, mid cap and small cap segments were hit particularly hard with declines approaching 18%.
Sectoral and Thematic Funds
Concentrating on one sector magnifies risk. If IT crashes, an IT sector fund crashes harder than a diversified fund.
Exiting During Corrections
Exiting during downturns converts notional losses into actual ones, eliminating the possibility of participating in the eventual recovery. Timing the market has proven nearly impossible even for professional investors.
Poor Fund Selection
Choosing funds with weak management, high expense ratios, or unclear strategies increases your risk. Always research before investing. Use our mutual funds tool to compare options.
The SIP Advantage During Market Falls
Here's a counterintuitive truth: market crashes can actually benefit SIP investors.
When you invest via SIP, you reap the benefit of rupee cost averaging. Suppose you invest ₹1000 in a fund whose NAV before a crash is 10.
You get 100 units. If NAV drops to 5 following a crash, you get 200 units for the same ₹1000.
While there is loss in mutual funds due to short term market disturbances, if you look at the long term, instances of negative returns drastically reduce after 3-4 years of holding.
Continuing SIPs during downturns helps buy more units at lower prices. This brings down your average cost and enhances returns when markets rebound.
During the 2020 Covid crash, markets fell by 38%, but many funds still delivered over 14% CAGR later. Investors who continued their SIPs benefited most.
Learn more about systematic investing in our SIP guide for NRIs.
SEBI Protections: How Regulation Safeguards You
Mutual funds in India operate under strict SEBI (Securities and Exchange Board of India) regulations. This framework provides multiple layers of protection.
Trust Structure
Your money is held separately from the AMC's own funds. Independent trustees oversee operations.
Mandatory Diversification
SEBI limits how much a fund can invest in any single stock (typically 10% maximum). This prevents over-concentration.
Daily NAV Disclosure
You know exactly what your investment is worth every business day.
Portfolio Transparency
Funds must disclose their complete holdings monthly. No hidden investments.
Expense Caps
SEBI limits fees funds can charge, preventing excessive extraction from your returns.
Compare this with unregulated investment schemes promising guaranteed high returns. The SEBI framework doesn't eliminate market risk, but it does protect against fraud and mismanagement.
👉 Tip: Always verify that any fund you invest in is SEBI-registered. Avoid any scheme promising "guaranteed" returns since those are either illegal or scams.
NRI-Specific Concerns: Currency and Repatriation
Beyond market risk, NRIs face additional considerations.
Currency Risk
If you're earning in AED and investing in INR funds, rupee depreciation affects your real returns. A fund gaining 12% in INR might only gain 8% in AED terms after currency adjustment.
Solution: Consider GIFT City mutual funds that operate in USD, eliminating currency conversion issues. Explore options through our GIFT City mutual funds tool.
Repatriation
Getting money back to the UAE is straightforward if you invest through NRE accounts. NRO accounts have annual limits. Understand these rules before investing via our repatriation guide.
Tax Implications
NRIs face TDS on redemptions. Losses can be set off against gains for tax purposes. Short-term capital loss can be set off against both STCG and LTCG in the same year.
Long-term capital loss can only be set off against LTCG.
If losses cannot be fully adjusted in one year, you can carry them forward for up to 8 assessment years.
Learn more about mutual fund taxation for NRIs.
What Should You Do If Your Portfolio Is Currently Down?
If you're reading this during a market correction with a red portfolio, here's practical advice.
Don't Panic Sell
Selling during downturns locks in losses. Markets have recovered from every crash in history.
Review Your Time Horizon
If you need the money within 1-2 years, consider gradually shifting to lower-risk options. If your goal is 5+ years away, stay invested.
Continue SIPs
This is actually the best time to buy more units at lower prices.
Avoid Tracking Daily
One of the major reasons investors in the early 1990s and 2000s could make stellar returns was that they were unable to track their investments daily. Check quarterly at most.
Consider Adding More
If you have surplus funds, corrections offer buying opportunities in quality funds.
Read our detailed guide on what to do when losing money in mutual funds.
Alternative Options for Extremely Risk-Averse NRIs
If the possibility of any temporary loss keeps you awake at night, alternatives exist.
GIFT City USD Fixed Deposits
Tax-free returns in USD with no currency risk. Compare rates through our NRI FD rates tool.
NRE Fixed Deposits
Tax-free in India, fully repatriable. Returns are lower but guaranteed. See our comparison of best NRI fixed deposit rates.
Government Bonds
Lower returns but sovereign guarantee. Explore government bonds for NRIs.
Debt Mutual Funds
Lower volatility than equity funds, though not completely risk-free. Check our guide on debt mutual funds.
For those interested in diversified alternatives, explore GIFT City Alternative Investment Funds and track markets with Gift Nifty.
Key Takeaways
Can you lose money in mutual funds? Yes, temporarily.
Can you lose all your money? In diversified funds regulated by SEBI, it's nearly impossible.
Every major crash in Indian market history has been followed by recovery. The 2008 crisis saw 50% declines followed by 162% gains. The 2020 Covid crash saw recovery within 8 months.
Your money is protected by trust structures even if fund companies fail. Diversification spreads risk across dozens of companies.
And most importantly, losses only become real when you sell.
The investors who lose the most are those who panic during corrections. Those who stay invested, continue SIPs, and give markets time to recover typically end up with strong returns.
Thousands of NRIs in our WhatsApp community have navigated market volatility together, sharing experiences and supporting each other through corrections. Join them for peer insights and guidance.
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