Can mutual funds perform badly? Why?

Mutual funds are managed by professional managers. Professional managers have to take certain judgement calls to generate certain performance and for that purpose they charge their fees. With this background we will try to answer this question whether mutual funds can perform badly or not.

Mutual funds as we have seen earlier are relative return products which means they invest in certain segment of the market or the market and the performance has to be seen in light of that. If the overall market or that particular segment underperforms or performs badly then the scheme investing in that market would perform badly.

For example, in the period of January 2008 to March 2009 overall stock market came down by more than 50 percent. so any scheme that was investing in equity stocks would have suffered a loss, but within that if a scheme was investing more in the real estate sector or infrastructure sector the loss would have been much larger, but if a scheme was investing in FMCG stocks or pharma stocks then the loss would have been muted or in certain cases they might have seen marginal appreciation also. So even within equity markets there could be different performance, so factor number one, overall market.

Factor number two could be the fees that the managers are charging. This is true more for the international markets. In India Sebi has put certain caps on the fees that can be charged or total expenses that can be charged. So to that extent there is not going to be much of a difference in Indian markets.