What 2019 taught mutual fund investors

ETMutualFunds.com receives several queries on its official Facebook page from investors trying to find out what is happening to their small cap and mid cap schemes.

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Every year teaches investors something before it makes way for another year. The year 2019 was no different. In fact, it had a number of lessons for mutual fund investors. Here are a few big ones for your quick reference.

The biggest lesson was about risk. The ongoing series of downgrades and defaults taught debt mutual fund investors an important lesson. The risks we learn about in mutual funds offer documents that need to be taken seriously. They always do not stay on paper, they can spring nasty surprises.

Many debt mutual fund investors, especially those in credit risk funds, learnt this lesson in the hard way. Even ultra conservative investors in fixed maturity plans were in for a rude shock to learn that locking up investments do not ensure safety. In short, all the theories have become a reality for debt mutual fund investors.


No wonder, many investors do not even trust the relative safety of liquid funds anymore. They were enquiring about overnight funds lately. Is there a way out to keep risk out completely? No, you cannot escape this monster completely if you are investing in a market-related investment like mutual fund, even if you predominantly invest in debt.

All you can do is to be extremely cautious about your investments. Avoid high-risk options like credit risk funds, long-term debt schemes, etc. and stick to liquid, ultra short duration, and short duration funds. Even this wont offer you 100% protection. Stick to large fund houses that strive to mitigate risk, and make sure the portfolio is diversified to rule out concentration risk.

Another important lesson many investors, especially the new ones, learnt in 2019 was about the risk in investing in mid cap and small cap schemes. Many investors got into mid cap and small cap schemes because they were performing well and most of these investors thought they were okay with the so-called risk. However, they started freaking out when these schemes fell sharply and there were no signs of any revival.
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ETMutualFunds.com receives several queries on its official Facebook page from investors trying to find out what is happening to their small cap and mid cap schemes. Well, you heard it right: these schemes can fall sharply and can have a prolonged bad phase in the market. They might test your patience - that is why mutual fund advisors say you should invest in them only if you have a very high risk threshold.

Use this opportunity. Reassess your risk. If you don’t have the necessary risk, stop your investments in risky avenues like mid cap and small cap schemes.

Also, memorise the lesson about the dangers of chasing returns all the time. Many investors got into these schemes, mainly because they focused solely on the returns provided by them at the time of investing. They ignored their risk profile while investing in these schemes. That is another crucial lesson many investors learnt in 2019.

Relative safety of large cap mutual funds was laid to rest in 2019. Sure, the category may have provided higher average returns, but only a few individual schemes could offer attractive returns. Their passive counterparts did much better in comparison on the back of a narrow rally.
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Lesson: large cap schemes may do relatively better in an uncertain environment. However, actively-managed large cap schemes may not be able to capture it entirely. Their ability to generate alpha is seriously questioned after the re-categorisation restricted their investment universe to top 100 stocks by market capitalisation.

Investors might do well to listen to their mutual fund advisors and start allocating a part of their large cap investments to passively-managed index schemes.
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