FY26 has proved to be a challenging year for several mutual fund investors, with a sharp rise in the number of schemes delivering negative returns. The discussion on ET Now Swadesh’s investment show has highlight how technology, digital and small-cap funds the brunt of the market correction, which leaves investors questioning wether they should stop their SIPs or exit underperforming funds.
According to data discussed on the show, the number of mutual fund schemes delivering negative returns in a year rose nearly threefold to 731 in FY26, compared with 243 in the previous year. At the same time the number of schemes generating more than 10 per cent returns fell to 198 from 304.
Despite the difficult performance, equity oriented schemes have continued to attract substantial investor money. The discussion noted that equity schemes received more than Rs 3.46 lakh crore during FY26, while equity assets under management were around Rs 32 lakh crore.
Technology and small-cap funds among the biggest casualties
Technology and digital-focused funds were among the worst performers highlighted in the discussion. Some schemes saw SIP-based decline of around 30-47 per cent, reflecting the weakness in the techlonogy sector.
Small-cap funds were also under significant pressure, with the category seeing an average decline of around 15 per cent in the period discussed. The sharp correction comes after small caps had delivered strong returns during the earlier market rally.
Experts said that investors should distinguish between short-term volatility and long-term investment performance.
“You cannot take a one-year number and decide whether you should change your investment strategy,” expert said.
Market expert Sunil Subramaniam said that diversification should not simply mean spreading money across large-, mid- and small-cap stocks. Investors also need diversification across sectors and asset classes.
He said, “When the broader market itself is under pressure, diversified equity funds can also experience negative returns. According to him, the weakness seen across the Nifty, Sensex and small-cap indices during FY26 naturally reflected in mutual fund performance.”
Should investors stop their SIPs?
The experts largely cautioned investors against stopping SIPs merely because a fund has delivered a negative one-year return.
For small-cap funds in particular, the advice was to have a much longer investment horizon. MoneyWorks’ Nisreen Mamaji, speaking during the discussion, said investors should ideally give small-cap investments at least three to four years before deciding whether to stop or switch their SIPs.
“Patience and tenure” are critical for small-cap investors.
The reasoning is straightforward: companies in the small-cap universe may take several years to execute infrastructure projects, expand capacity or unlock their potential. Consequently, price and value discovery can take time.
Diversification needs to go beyond equity
One of the key takeaways from the discussion was that simply owning large-cap, mid-cap and small-cap funds may not provide adequate diversification during a broad equity-market correction.
Experts suggested considering a broader asset-allocation approach that can include equity, debt, gold and other asset classes depending on an investor’s risk profile and financial goals.
Balanced Advantage and Multi-Asset funds were also discussed as possible options for investors who do not want to remain 100 per cent exposed to equities. Such strategies can combine equity with fixed income, arbitrage and other asset classes.
While SEBI data underlines the growing importance of asset diversification. In January 2026, Gold ETFs attracted Rs. 24,040 crore of net inflows, marginally surpassing the Rs. 24,029 crore received by active equity/growth-oriented schemes that month.
Should investors switch to index funds?
Another important question raised during the discussion was whether investors would have been better off choosing index funds or ETFs when active flexi-cap and large-cap funds failed to beat their benchmarks.
The experts stressed that investors should not automatically switch simply because a fund has underperformed for six or eight months. Instead, they should assess the fund’s long-term performance, investment strategy, consistency and suitability to their financial goals.
What should investors ask their mutual fund distributor?
The discussion also highlighted the importance of evaluating the quality of advice received from distributors and advisers.
Rather than asking only why a fund has fallen, expert investors should ask:
Was the fund selected according to my risk appetite?
Does the fund fit my financial goals?
What is the intended investment horizon?
Why does this particular allocation make sense for my portfolio?
Is the current underperformance temporary or is there a structural problem?
Sunil Subramaniam has said that the right way to judge an adviser is by whether the fund recommendation was aligned with the investor’s risk appetite and financial goals, rather than by looking at one year’s returns.
“Do not judge the adviser by one year’s return if the portfolio was constructed according to the investor’s risk appetite and goals,” he said.
Don’t panic over one bad year
For long-term investors, market corrections can also create an opportunity to accumulate more units through rupee-cost averaging. However, this does not mean every poorly performing fund should be held indefinitely. Investors should periodically review whether the fund continues to fit their objectives, risk profile and investment horizon.
As the experts pointed out, investors should focus less on one-year returns and more on whether their overall portfolio is genuinely diversified and aligned with their long-term financial goals.
(Disclaimer: The above article is meant for informational purposes only and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money-related decisions.)
