Can I lose money in mutual funds? Yes, you can—and understanding this is the first step to becoming a smarter investor. Let me be direct with you: the short answer is yes—you can absolutely lose money in mutual funds. This isn’t intended to discourage you from investing; rather, it’s a fundamental truth that every investor must understand before committing capital. In 2025 alone, over a dozen equity mutual funds experienced losses exceeding 10%, with some experiencing declines of 19–21%. However, understanding why losses happen and how to recover from them is what separates casual investors from disciplined wealth-builders.

The critical distinction lies in understanding that losses in mutual funds are not guarantees—they’re possibilities. The value of your mutual fund investment is directly tied to the Net Asset Value (NAV) of the fund’s underlying securities. When the NAV drops, your investment value declines proportionally. For example, if you invest Rs. 90,000 in a fund trading at Rs. 45 per unit, you own 2,000 units. If the NAV falls to Rs. 35 per unit, your holdings become worth Rs. 70,000—a real loss of Rs. 20,000.​

Why Do Mutual Funds Experience Losses?

Understanding the mechanics of loss is the first step toward mitigation. Multiple factors can drive mutual fund losses, and they often work in combination rather than isolation.

Market Downturns and Economic Shifts
When stock and bond markets decline due to recessions, geopolitical tensions, or economic uncertainty, the underlying assets in mutual fund portfolios depreciate in value. The 2025 market environment demonstrates this clearly—equity funds with exposure to small caps, mid caps, and thematic sectors suffered significant drawdowns. For instance, Shriram Multi Sector Rotation Fund lost 21.45% in 2025, while technology-focused funds underperformed due to slower global tech spending and currency risks. This wasn’t the fault of the fund manager necessarily; it reflected broader market conditions where growth stocks faced headwinds from higher valuations and uncertain earnings visibility.

Sector-Specific Headwinds
Concentration risk becomes particularly acute in thematic or sector-specific funds. Pharma funds faced US pricing regulation pressures and tariff-related concerns, while IT funds suffered from slower global capital expenditure. These sector-wide challenges directly cascade into fund losses for investors who concentrated their portfolios in these areas.​

Interest Rate and Credit Risks
Debt mutual funds, while generally considered lower-risk, are not immune to losses. When interest rates rise during inflationary periods, the value of existing bonds declines. Credit risk in debt funds arises when issuers default on interest payments or repayment of principal. A counterparty default can result in immediate losses that ripple through the fund’s portfolio.​

Fund-Specific Underperformance
Sometimes losses stem from poor fund manager decisions rather than market conditions. When fund managers make suboptimal investment choices or fail to rebalance appropriately during volatility, their funds underperform benchmark indices and peer funds, translating to investor losses.​

The 8 Critical Risks That Can Cause Mutual Fund Losses

Not all mutual fund risks are created equal, and understanding the risk hierarchy helps investors make smarter allocation decisions.

The most insidious risk for individual investors is often concentration risk—the temptation to invest heavily in funds that have performed well recently, then watching those same funds collapse when market sentiment reverses. This is precisely what happened in 2025 when many investors who chased thematic funds found themselves holding positions that declined 15-21%.

Real 2025 Data: What Actually Happened to Mutual Fund Investors

The most recent data provides a sobering but instructive reality check. While some international funds delivered exceptional returns (DSP World Mining Overseas Equity delivered 74.51% returns in 2025), the broader equity fund landscape showed significant stress.​

Hardest-Hit Categories:

• Thematic Funds: Shriram Multi Sector Rotation Fund (-21.45%), Samco Flexi Cap Fund (-19.84%)
• Momentum/Active Funds: Union Active Momentum (-17.67%), Samco Active Momentum (-17.06%)
• Sector Funds: Quant Technology Fund (-16.07%), ITI Pharma & Healthcare Fund (-9.60%)
• Mid-Cap Exposure: Motilal Oswal Midcap Fund (-11.17%), SBI Midcap Fund (-1.69%)

This data reveals an important pattern: concentrated bets on specific themes or sectors carry substantially higher downside risk than diversified approaches. Investors who owned a mix of large-cap, mid-cap, debt, and hybrid funds experienced far less damage than those overweighted in growth-oriented or sector-specific positions.​

Can Mutual Funds Recover? The Evidence Says Yes—But It Takes Discipline

The question that keeps many investors awake at night is whether mutual funds can actually recover from significant losses. The historical evidence is reassuring, though it requires patience.

Typical Mutual Fund Recovery Timeline Post-Market Crash 

Historical Recovery Data:
After the 2008 global financial crisis, equity mutual funds that had declined 40-50% recovered to their pre-crash levels within 2-4 years. This recovery wasn’t linear—it involved multiple false starts and corrections—but disciplined investors who remained invested were rewarded handsomely. Investors who panic-sold near the bottom locked in their losses permanently; those who held or continued investing through SIPs captured the rebound.​

Average Recovery Timelines:

• Minor Corrections (5-10% decline): 6-12 months typical recovery
• Moderate Corrections (10-20% decline): 1-2 years average recovery
• Severe Crashes (30%+ decline): 2-4 years recovery in most scenarios​

The critical variable isn’t whether recovery occurs—it’s whether you remain invested long enough to capture it. This is where Systematic Investment Plans (SIPs) prove their worth, as they allow investors to continue buying into declining markets at lower cost, thereby improving their average entry price and enhancing recovery gains.

How Losses Happen in Mutual Fund NAVs: A Real Example

Let me walk through a concrete scenario to make this tangible. Suppose you invested Rs. 1,00,000 in an equity mutual fund in January 2025 at a NAV of Rs. 100 per unit, giving you 1,000 units. By June 2025, market corrections pushed the NAV to Rs. 75 per unit, and your holding was now worth Rs. 75,000—a paper loss of Rs. 25,000 or 25%.

What Happens Next?

Most investors experience intense psychological pressure at this point. The loss feels real (it is, on paper), and the natural human response is to exit to prevent further decline. However, if the fund’s underlying holdings are sound and the decline stems from temporary market conditions rather than fund-specific problems, the NAV can recover.

Assume by December 2025, the NAV recovers to Rs. 95 per unit. Your 1,000 units are now worth Rs. 95,000. You’ve recovered 80% of your initial loss without taking any action. This is precisely what happened to quality large-cap and diversified funds during 2025’s second half.​

The tragedy occurs when investors sell at Rs. 75 NAV, locking in a loss, then reinvest at Rs. 95 NAV, essentially buying higher after selling lower—the exact opposite of intelligent investing.

7 Proven Strategies to Mitigate and Recover From Mutual Fund Losses

1. Maintain a Long-Term Investment Horizon

The single most powerful loss-mitigation tool at your disposal is time. Equity mutual funds held for 7-10+ years have historically shown dramatically lower probabilities of loss. Research shows that equity funds in India have delivered positive returns over every 10-year period in recent history, despite multiple intermediate corrections.

Action Step: Before investing a single rupee, commit to a minimum holding period aligned with your goal. If you need the money within 2 years, equity funds are inappropriate; debt or hybrid funds make more sense. For retirement or child education goals (10+ years), equity funds are ideal vehicles.

2. Build a Diversified Portfolio Across Asset Classes

Concentration risk is perhaps the most preventable source of losses for individual investors. Rather than investing Rs. 5 lakh in a single high-growth equity fund, a more intelligent approach for moderate risk-tolerance investors is:

• 60% Equity Funds (diversified across large-cap, mid-cap, and balanced sectors)
• 25% Debt Funds (to buffer volatility and provide stability)
• 15% Hybrid/Balanced Advantage Funds (for dynamic risk management)

When equity markets decline, your debt and hybrid holdings maintain value, reducing the overall portfolio drawdown and eliminating the psychological pressure to panic-sell. This approach might have reduced the impact of 2025’s corrections by 40-50% for investors in diversified allocations versus those concentrated in growth funds.​

3. Use SIPs to Master Rupee Cost Averaging

This is where emotional investing meets mathematical elegance. A Systematic Investment Plan (SIP) involves investing a fixed amount regularly—say Rs. 5,000 monthly—regardless of market conditions. When markets are high, you buy fewer units; when markets are low (during crashes), you buy more units at cheaper prices.

Real Example from 2025:
An investor who started a Rs. 5,000 monthly SIP in January 2025 experienced significant paper losses during the February-June correction. However, the declining NAVs meant each Rs. 5,000 contribution was buying more units. By year-end, when markets recovered, those additional units purchased at lower cost positions the investor for substantially higher returns than a lump-sum investor.​

The mathematics are compelling: rupee cost averaging doesn’t eliminate losses during downturns, but it systematically reduces your average cost basis, creating a mechanical advantage that ordinary lump-sum investors simply don’t possess.

4. Establish an Emergency Fund in Liquid Schemes

A critical mistake investors make is deploying their entire corpus into equity funds without maintaining a safety buffer. When life throws an unexpected expense (medical emergency, job loss, vehicle repair) during a market decline, investors are forced to sell equity funds at the worst possible times—at the bottom of the market.

Recommended approach: Allocate 10-15% of your investment portfolio to ultra-liquid schemes (overnight funds, money market funds, or savings funds) that offer immediate redemption and stable value. These typically return 5-6% annually and absorb your emergency cash needs, protecting your long-term equity portfolio from premature liquidation.​

5. Monitor, Review, and Rebalance Periodically

Passive inaction is not the same as deliberate patience. Every 6-12 months, review your portfolio allocation to ensure it hasn’t drifted from your original targets. If volatility has driven your equity allocation to 75% from your target of 60%, rebalance back to 60% by moving excess into debt or hybrid funds. This disciplined rebalancing forces you to “buy low” (equity funds when they’re beaten down) and “sell high” (shifting profits from equity into safer alternatives).

Additionally, track your fund’s performance against its benchmark index and peer funds. If a fund consistently underperforms its benchmark by 2-3% annually for 2+ years, replace it with a better-performing alternative. This isn’t market timing; it’s replacing mediocrity with quality.​

6. Consider Tax Loss Harvesting for Efficiency

This advanced strategy applies primarily to investors with large lump-sum positions. If you’ve suffered unrealized losses in one fund while holding gains in another, you can sell the losing fund to book the loss, then immediately reinvest the proceeds in a similar (but not identical) fund. The realized loss can offset your capital gains elsewhere in your portfolio, reducing your tax liability.​

Important: In India, this strategy is most effective when you have long-term capital gains (LTCG) from other investments. If your equity fund holdings have gained Rs. 3,00,000 over 13+ months, you owe tax on gains exceeding Rs. 1,00,000. By booking a Rs. 50,000 loss on an underperforming fund, you reduce your taxable LTCG by Rs. 50,000, lowering your tax bill by approximately Rs. 5,000 (at the 10% LTCG rate).​

7. Shift to Conservative Strategies as You Approach Goals

Once you achieve your financial goal earlier than expected, don’t continue taking equity-level risk. If you’ve invested Rs. 10,00,000 in equity funds targeting Rs. 15,00,000 for a home down payment, and you’ve already reached Rs. 15,00,000 (perhaps due to exceptional market returns), moving Rs. 10,00,000 to balanced advantage or debt funds is prudent. Balanced advantage funds dynamically manage equity-debt allocation to reduce downside during corrections while capturing upside during rallies—ideal for protecting wealth once it’s been created.​

The Angel One Advantage: Investing Safely Without Friction

Why Choose Angel One for Your Mutual Fund Journey?

For investors ready to implement these strategies, having the right platform matters tremendously. Angel One stands out as an optimal choice for mutual fund investors in India, combining accessibility, affordability, and comprehensive functionality.

Key Benefits for Mutual Fund Investors:

How to Start Your Mutual Fund SIP on Angel One:

1. Download the Angel One app and complete online KYC (eKYC) verification—takes 5 minutes
2. Open your demat account at zero cost; your unique 16-digit account ID is generated instantly
3. Search for your desired mutual fund scheme from Angel One’s comprehensive database
4. Set up your SIP with your preferred amount (can start as low as Rs. 100/month) and frequency (monthly, quarterly, etc.)
5. Link your bank account for automatic monthly debits on your chosen SIP date
6. Monitor your investments through the real-time dashboard showing NAV, units held, and portfolio value

This straightforward process democratizes access to professional investment strategies that were previously available only to HNI investors.

Recovery is Possible: The 10-Year Success Stories

Let’s close with perspective. Investors who maintained discipline during the 2008 financial crisis have achieved annualized returns of 14-18% over the subsequent 16+ years. Those who held through the 2020 COVID crash captured exceptional gains in 2021-2023. The pattern is consistent: losses are temporary obstacles for patient investors, not permanent defeats.​

One investor in India who started investing in multi-cap funds around 2015 reports a current CAGR of 18%, despite holding through multiple significant corrections. Another who initiated a diversified portfolio in 2008 at the market bottom achieved 14% annualized returns over 16+ years, substantially outpacing fixed deposits (4-7% returns) and inflation (6-8% annual average).​

These aren’t exceptional outliers—they’re representative outcomes for investors who:

• Started early
• Invested consistently (via SIPs)
• Diversified appropriately
• Resisted panic-selling
• Monitored without obsessing

FAQs: Your Mutual Fund Loss Questions Answered

Q1: Can I lose my entire investment in mutual funds?
A: Highly unlikely. While extreme scenarios exist (fund bankruptcy is exceptionally rare in regulated Indian mutual funds), well-diversified funds have multiple safeguards. SEBI regulations mandate prudent fund management, and diversification ensures no single security represents a major portfolio component. Even during 2008’s crisis, equity funds declined 40-50%, not 100%.​

Q2: How long does it typically take for mutual fund losses to recover?
A: Historical data shows recovery times of 6 months to 3 years for typical corrections, and 2-4 years for severe crashes. However, immediate recovery isn’t guaranteed—some funds may take 5-7 years to recover depending on the underlying business cycle. This reinforces the importance of long-term investing horizons.​

Q3: Is it better to exit a mutual fund when losses appear?
A: Absolutely not—unless the loss is due to fund-specific issues (consistent underperformance vs. benchmark for 2+ years, fund closure, or changed fund manager strategy). Market-driven temporary losses followed by exit locks in losses permanently. Historically, staying invested or continuing SIPs through losses has yielded superior outcomes.

Q4: Can I use mutual fund losses to reduce my taxes?
A: Yes, via tax loss harvesting. If you have capital gains elsewhere in your portfolio, you can book losses in underperforming funds to offset those gains. Additionally, capital losses can be carried forward for 8 years in India to offset future gains.​

Q5: Which type of mutual fund has the lowest loss risk?
A: Debt mutual funds and liquid funds have substantially lower loss risk than equity funds. However, they also deliver lower returns, averaging 5-7% annually. For long-term wealth creation (10+ years), equity funds offer superior risk-adjusted returns despite higher interim volatility.​

Q6: What’s the best way to recover from mutual fund losses?
A: Combine multiple strategies: continue SIPs to reduce average cost basis, rebalance your portfolio, maintain an emergency fund to avoid forced selling, monitor for fund-specific underperformance, and maintain a long-term perspective. Recovery is typically mechanical if the fund’s underlying securities are sound—it just requires patience.

Q7: Should I invest in mutual funds if I’m afraid of losses?
A: Fear of losses is legitimate—you can lose money. However, you also lose purchasing power through inflation if you avoid investing entirely. A balanced approach: start with lower-risk debt or hybrid funds, use SIPs to reduce timing anxiety, and gradually increase equity exposure as your comfort grows.

Q8: How do I choose between lump-sum and SIP investments?
A: If you have a large sum and believe the market is reasonably valued, consider both: invest 50% lump-sum, then deploy the remaining 50% via monthly SIPs over 6-12 months. This combines the potential of lump-sum investment with the risk-mitigation of rupee cost averaging. For most investors, consistent SIPs are psychologically and mathematically superior.

The Final Word: Losses Are Features, Not Bugs

Yes, you can lose money in mutual funds. This isn’t a reason to avoid mutual funds; it’s a reason to invest intelligently. Losses are temporary obstacles for long-term investors—they’re the price paid for the exceptional returns that equity markets deliver over extended periods.

The investors who genuinely suffer from mutual fund losses aren’t those who experience temporary NAV declines; they’re those who panic-sell at the bottom, converting paper losses into realized losses. The investors who thrive are those who:

• Understand the risks they’re taking
• Build diversified portfolios aligned with their risk tolerance
• Use systematic investment approaches (SIPs) to reduce timing anxiety
• Maintain emergency funds to avoid forced selling
• Rebalance periodically
• Remain disciplined during market volatility

For practical implementation, Angel One provides the infrastructure to execute these strategies with minimal friction. From your first Rs. 100 SIP to a multi-million-rupee diversified portfolio, Angel One’s commission-free structure and intuitive platform eliminate barriers between you and long-term wealth creation.

Your mutual fund journey begins not with the perfect timing or the perfect fund selection—it begins with the decision to start, understanding the risks, and committing to discipline. The recovery from losses isn’t mysterious; it’s mathematical. Stay invested, stay systematic, and let time and compounding do their work.

Must Read: Are Mutual Funds Safe for Middle Class? A Complete Guide to Secure Wealth Building