Mutual Fund Losses: Market Volatility vs Plan Type – What Investors Should Know

A recent 12-day dip of Rs 1.5 lakh in a mutual fund portfolio has prompted questions about whether the structure of the investment plan – regular versus direct – is to blame. Experts overwhelmingly say that short-term portfolio fluctuations are far more likely driven by broader market volatility, global economic developments, and geopolitical events than by the plan type itself. While direct plans typically boast lower expense ratios, switching between the two requires careful consideration of tax implications, diversification strategies, and long-term financial goals.

The Weight of Global Events

The current market unease stems, in part, from escalating geopolitical tensions, specifically the US and Israel’s recent military actions against Iran. This conflict, as noted by CNN, is expected to initially manifest as increased market volatility and higher gasoline prices. Beyond this immediate impact, the potential for sustained turmoil raises concerns about broader inflationary pressures and even a possible recession. However, financial analysts emphasize the importance of historical perspective. As Adam Grossman, founder of Mayport Wealth Management, points out, markets have historically recovered from past crises, including the 2022 Russian invasion of Ukraine and the 2025 imposition of tariffs by President Trump.

Vijay’s Portfolio: A Case Study

This broader context is relevant to the experience of Vijay, a 43-year-old IT professional from Haryana. Vijay inherited a mutual fund portfolio in 2023, originally created by his father in 2013, currently valued at approximately Rs 31 lakh based on an initial investment of Rs 15.5 lakh. The portfolio consists entirely of regular plans offered by SBI Mutual Fund, including schemes like SBI Equity Hybrid Fund, SBI Contra Fund, SBI ESG Fund, SBI Consumption Opportunities Fund, SBI Focused Fund, and SBI MNC Fund. He had previously been making regular Systematic Investment Plan (SIP) contributions, but paused them in October 2025.

The recent Rs 1.5 lakh decline over 12 days led Vijay to question whether his choice of regular plans was the culprit, prompting consideration of a switch to direct plans and a potential portfolio restructuring to maximize the Rs 1.25 lakh long-term capital gains exemption before the end of March.

Concentration Risk and Diversification

Mutual fund expert Vishwajeet Parashar identifies a key issue in Vijay’s portfolio: concentration risk. All investments are currently held with a single asset management company. While SBI Mutual Fund is a large and established player in the Indian market, Parashar advises diversifying across different fund houses to mitigate risk and improve portfolio balance. He cautions against a complete and immediate redemption of the portfolio, citing potential capital gains tax implications.

“He should diversify across AMCs for better diversification, and should not idly redeem the entire 30 lakhs in one chunk and he should withdraw slowly and gradually given that otherwise, he would draw a great amount of capital gain tax,” Parashar stated. Redeeming the entire amount at once could result in a capital gains tax of roughly Rs 1.8 lakh. A staggered approach, spreading withdrawals across financial years, can help minimize this tax burden.

Navigating the Tax Landscape

Parashar recommends utilizing the available Rs 1.25 lakh long-term capital gains exemption before March 31 by strategically redeeming units from selected funds. Within the existing portfolio, he highlights the strong performance of the SBI Contra Fund and SBI Focused Fund, suggesting they be maintained. The remaining funds could be gradually redeemed as part of the portfolio restructuring and diversification process.

Regular vs. Direct: The Expense Ratio Factor

Addressing Vijay’s specific concern, Parashar clarifies that the recent portfolio decline is not attributable to the use of regular plans. The primary driver is market volatility and geopolitical tensions. The key difference between regular and direct plans lies in the expense ratio. Direct plans have lower costs because they eliminate distributor commissions. However, switching between the two is treated as a redemption and subsequent reinvestment, triggering tax implications even within the same fund house.

Proposed Portfolio Allocation: A Refined Approach

Vijay proposed a new allocation strategy, including 50% in flexi-cap funds (Parag Parikh Flexi Cap Fund and HDFC Flexi Cap Fund), 15% in midcap funds (HDFC Midcap Fund and Edelweiss Midcap Fund), 15% in global equities, and 10% in gold. Parashar supports the overall fund selection but suggests streamlining the flexi-cap and midcap allocations. He recommends focusing on the Parag Parikh Flexi Cap Fund, which already provides some exposure to global equities, and retaining only the HDFC Midcap Fund, avoiding duplication within categories.

Continuing with the SBI Contra Fund and SBI Focused Fund, alongside these selections, would provide diversification across fund houses and investment styles. Given Vijay’s planned direct investments in gold and silver, additional multi-asset or multi-cap funds may not be necessary.

Long-Term Outlook and Retirement Planning

With current SIP contributions of Rs 90,000 per month and an assumed average annual return of 12%, Vijay’s SIP investments are projected to grow to approximately Rs 73 lakh over the next five years. His existing portfolio, currently around Rs 29.5 lakh after the recent decline, could potentially reach Rs 52 lakh over the same period, bringing his total corpus to around Rs 1.25 crore – exceeding his target of Rs 1 crore.

For long-term retirement planning, Parashar suggests considering hybrid-oriented funds that offer downside protection as Vijay approaches retirement. Funds like ICICI Balanced Advantage Fund or ICICI Multi Asset Fund can help balance equity exposure and reduce volatility. He advises maintaining an equity-focused portfolio for now, gradually shifting a portion of the corpus towards hybrid or debt-oriented funds approximately one year before retirement to safeguard accumulated gains.

Market Resilience: A Historical Perspective

As Meridian Financial Partners highlights, historical data from Hartford Funds demonstrates that the stock market has consistently shown resilience in the face of geopolitical uncertainty. Stocks have generated positive returns one year after an act of aggression in 73% of armed conflicts since World War II. The longer the investment timeframe, the greater the likelihood of a positive return. This historical pattern suggests that while short-term volatility is inevitable, long-term investors are likely to recover and benefit from market growth.

the key takeaway for investors is that short-term declines in mutual fund portfolios are typically linked to market movements rather than the type of plan chosen. While switching from regular to direct plans can reduce costs over time, it doesn’t offset losses incurred during market downturns. Such decisions should be made carefully, considering tax implications, diversification, and long-term investment objectives.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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