Mutual funds do not always increase in value
Mutual funds rise and fall in value based on what the stocks, bonds, or other investments inside them are worth on any given day. When the companies in the fund do well, the fund's value goes up. When those companies struggle or the overall market drops, the fund's value drops too. You can lose money in a mutual fund, and that loss is real — it is not temporary if you sell when the price is down.
The fund's value changes every business day, and you only know what you actually made or lost when you sell your shares. If you hold the fund through a market downturn and do not sell, you have not locked in a loss, but you also have not recovered it yet. Many people who invest in mutual funds for decades do see their money grow overall, but that growth is not may provide, and the path there includes periods where the fund is worth less than what they put in.
Key Takeaways
- Mutual fund values change daily based on the performance of the investments inside them, and they can fall as well as rise.
- A fund can lose 20, 30, or more percent of its value during a market downturn, and recovering that loss takes time.
- Selling a mutual fund when its price is down locks in your loss; holding it means the loss is on paper only until you decide to sell.
- Long-term investors often see growth over decades, but past performance does not mean future results will be the same.
- Different types of funds carry different levels of risk — bond funds typically fluctuate less than stock funds.
How market downturns affect mutual fund prices
When the stock market drops, most stock mutual funds drop with it. The size of the drop depends on what is inside the fund. A fund that holds large, stable companies might fall 15 percent during a bad year. A fund that holds smaller or riskier companies might fall 30 or 40 percent. A bond fund typically falls less because bonds are generally less volatile than stocks, though they can still lose value if interest rates rise sharply.
These downturns happen regularly. The market has experienced significant declines roughly every 5 to 10 years over the past several decades. If you own a mutual fund during one of these periods, you will see your account balance shrink. That is not a sign the fund is broken or that you made a bad choice — it is how markets work. The question is whether you can afford to wait for the recovery, which historically has happened, but not on a predictable schedule.
The difference between a paper loss and a real loss
A paper loss is a decline in value that you have not acted on. If you bought a mutual fund for $10,000 and it is now worth $8,000, you have a $2,000 paper loss. If you do not sell, that $8,000 stays in the fund and can grow back to $10,000 or higher. The loss is real in the sense that your money is worth less right now, but it is not final.
A real loss happens when you sell. If you sell that $8,000 fund position, you have locked in the $2,000 loss. You now have $8,000 in cash instead of a fund that might recover. This is why timing matters: selling during a downturn turns a temporary decline into a permanent one. Many investors who sold mutual funds during the 2008 financial crisis or the 2020 pandemic crash missed the recovery that followed within months or a year.
Why some funds perform better than others during downturns
Not all mutual funds fall by the same amount. A fund focused on dividend-paying stocks from large, established companies typically falls less than a fund focused on growth stocks or emerging markets. A bond fund usually falls less than a stock fund. A money market fund, which holds very short-term, low-risk debt, barely moves at all.
This is why the type of fund matters. If you cannot afford to see your money drop 30 percent, a stock-heavy fund is probably not right for you. If you have 30 years until retirement and can ride out downturns, a stock fund may make sense because stocks have historically grown more over long periods than bonds or cash. The fund itself is not the problem — the mismatch between the fund's risk level and your ability to tolerate losses is the problem.
What past performance actually tells you
Mutual fund documents always include a disclaimer: past performance does not may provide future results. This is not just legal language — it is true. A fund that returned 10 percent per year for the last 10 years might return 2 percent next year or lose 5 percent. The fund's strategy does not change, but market conditions do, and those conditions drive returns.
Long-term historical data shows that stock mutual funds have grown on average over decades, but that average includes years of loss and years of gain mixed together. You cannot predict which years will be which. A fund that has done well recently might underperform for the next five years. A fund that has lagged might catch up. The only thing you can count on is that the fund's value will fluctuate.
How fees and expenses affect whether you make money
Even when a fund's underlying investments perform well, fees eat into your returns. A mutual fund charges an annual expense ratio — a percentage of your money that goes to pay the fund manager, the fund company, and other costs. A fund with a 0.5 percent expense ratio costs you $50 per year on a $10,000 investment. A fund with a 1.5 percent expense ratio costs you $150 per year on the same investment.
Over decades, that difference compounds. If two funds have identical investment performance but one charges 0.5 percent and the other charges 1.5 percent, the lower-cost fund will have significantly more money at the end. Some funds also charge sales loads — upfront fees when you buy — which when ready reduce the amount of your money that goes into investments. These costs do not prevent you from making money, but they do reduce how much you keep.
What to do if your mutual fund loses value
If your fund drops in value, you have three choices: sell and lock in the loss, hold and wait for recovery, or add more money to buy at the lower price. Which choice makes sense depends on why you own the fund and how long you plan to hold it.
If the fund no longer matches your goals or risk tolerance, selling makes sense even if you take a loss. If you still believe in the fund's strategy and you have time before you need the money, holding is often the right move — many investors who held through the 2008 crisis saw full recovery by 2013. If you have extra money and still believe in the fund, buying more at the lower price can lower your average cost per share, though this only works if the fund eventually recovers.
Do not sell just because the market is down and you are afraid. Fear-based selling locks in losses and often happens right before a recovery. Do not hold just because you are stubborn about admitting a mistake. If the fund's strategy has changed or no longer fits your situation, selling is the right choice regardless of the current price.
Frequently Asked Questions
Can a mutual fund go to zero?
A mutual fund can lose most of its value, but it going completely to zero is extremely rare. The fund company would have to liquidate the fund, which happens when it closes because it is too small or the strategy is no longer viable. Even then, you get whatever the remaining assets are worth. A fund losing 50 or 70 percent is possible; losing 100 percent is not.
Is it better to sell a losing mutual fund and buy a different one?
Not necessarily. Selling locks in your loss, and if the new fund performs worse, you have made things worse. If you are selling because the original fund's strategy no longer fits your goals, that makes sense. If you are selling just because it is down, you are likely making an emotional decision that costs you money. Consider whether the fund's approach is still sound for your situation before you switch.
How long does it usually take for a mutual fund to recover from a loss?
Recovery time varies widely. After the 2008 financial crisis, stock funds took roughly four to five years to return to their previous highs. After the 2020 pandemic crash, many recovered within months. There is no fixed timeline. Some losses recover quickly; others take years. This is why holding period matters — if you need the money in two years, a stock fund is risky because you might be forced to sell during a downturn.
Should I stop investing in a mutual fund if it has had a bad year?
Not automatically. One bad year does not mean the fund is broken or that its strategy is flawed. Markets have bad years regularly. If you are investing regularly through a retirement account, a bad year actually helps you — your contributions buy more shares at the lower price. If the fund's strategy has fundamentally changed or the manager has left, that is a reason to reconsider. A single year of poor performance is not.
Do bond mutual funds always go up?
No. Bond funds can lose value when interest rates rise, because existing bonds with lower rates become less valuable. A bond fund can also lose value if the companies or governments that issued the bonds default. Bond funds are generally less volatile than stock funds, but they are not risk-free. A fund holding bonds from stable governments or high-quality companies typically fluctuates less than a fund holding bonds from riskier issuers.