Nearly 40% of Mutual Fund Schemes Gave Negative Returns in FY26. Should Investors Worry?

Nearly four out of every ten mutual fund schemes covered by SEBI delivered a negative return in FY26. That sounds worrying for a new investor.

But the number needs to be read correctly. It does not mean 40% of mutual fund investors lost money. It also does not mean 40% of the industry's assets disappeared.

SEBI counted schemes based on one-year returns, not investors, folios or invested amounts. The finding shows how widely weak returns were spread across schemes, not how many people made a loss.

What Exactly Does SEBI's Mutual Fund Return Data Show?

SEBI's Annual Report 2025-26 groups mutual fund schemes into six return ranges. The calculation uses the annual return of each scheme's Direct Plan Growth option.

Source: SEBI Annual Report 2025-26. Totals and percentages below are calculated from SEBI's bucket counts.

In FY26, 731 of the 1,841 schemes were in a negative-return bucket. That works out to 39.7%. In FY25, 243 of 1,617 schemes, or about 15.0%, had negative returns.

The weak year also reduced the number of big winners. Schemes returning more than 10% fell from 304 to 198, a decline of nearly 35%. Their share of the scheme universe dropped from about 18.8% to 10.8%.

These are scheme counts. A small scheme and a very large scheme each count as one. The table cannot tell us what proportion of investor money earned a negative return.

SEBI covered 1,841 schemes in FY26, up from 1,617 in FY25, so percentages give a cleaner comparison than raw counts. The negative-return share rose from about 15.0% to 39.7%, much faster than the scheme universe expanded. Schemes earning more than 5% fell from 71.5% to 40.0% of the universe.

What Does Direct Plan Growth Option Mean?

A direct plan does not include a distributor's commission, so its expense ratio is generally lower than the regular plan's. A growth option keeps gains invested in the fund. An investor's actual return can still differ because of their investment and withdrawal dates.

How Does a Mutual Fund Show a Loss?

Every mutual fund has a Net Asset Value, or NAV. Think of it as the per-unit value of the fund after adding the market value of its investments and other assets, subtracting liabilities and expenses, and dividing the balance by the units outstanding.

Suppose a fund's NAV was ₹100 at the beginning of FY26 and ₹95 at the end. Its point-to-point return was negative 5%, before considering any applicable investor-level tax or exit load. The fund has not “closed” or permanently destroyed every investor's money. It simply means one unit was worth less on the ending date than on the starting date.

For a growth option, dividends or interest received by the portfolio remain inside the scheme and are reflected in NAV. Therefore, its return is not merely the change in the quoted prices of the securities it owns.

Why Did So Many Mutual Fund Schemes Give Negative Returns in FY26?

Mutual fund returns come from the assets they own. Equity schemes hold shares, debt schemes hold bonds and international schemes hold overseas assets. Their NAVs move with those markets.

FY26 was a difficult year for Indian equities. The Nifty 50 declined 5.1%, the Sensex fell 7.1%, the Nifty 500 lost 3.8% and the Nifty Smallcap 100 declined 5.5%. The Nifty Midcap 100 was an exception, gaining 1.9%.

Weakness was uneven. Nifty Realty fell 23.5% and Nifty IT declined 21.2%, while Nifty PSU Bank gained 25.7%, Nifty Metal rose 22.5% and Nifty Auto advanced 11.6%. These figures come from SEBI's review of NSE and BSE data.

Funds concentrated in weak sectors had a harder starting point than funds exposed to stronger sectors. Volatility, geopolitical tension and foreign selling added pressure. SEBI reported net FPI equity outflows of about ₹1.81 lakh crore in FY26. This supports a market-cycle explanation, but does not mean all 731 schemes fell for the same reason.

The starting valuation also matters. When share prices have risen faster than company earnings, investors may become less willing to pay high valuations. A correction can then reduce fund NAVs even if the long-term business prospects of many portfolio companies remain intact. SEBI noted that the Nifty 50's trailing price-to-earnings ratio moderated from 21.4 at the end of FY25 to 19.6 at the end of FY26.

Finally, the table includes more than domestic equity funds. Equity responds to earnings and valuation, debt to interest rates and credit events, gold to global prices and currency, and overseas funds to foreign markets and the rupee. One explanation cannot fit every scheme.

Which Mutual Fund Categories Were Most Exposed?

SEBI's return table does not divide the 731 negative-return schemes by category. So it cannot support a precise claim such as “most losing schemes were small-cap funds.” That would require a separate scheme-level dataset using the same dates and methodology.

The index evidence still shows where pressure was strongest:

• Sectoral and thematic funds linked to realty, IT, technology, FMCG or media faced weaker benchmarks. Concentration meant they had fewer places to hide.
• Small-cap funds faced a negative small-cap benchmark and typically carry higher volatility than diversified large-cap funds.
• Mid-cap funds had a relatively better benchmark backdrop because the Nifty Midcap 100 ended FY26 slightly positive. Individual schemes could still be negative because portfolios differ from the index.
• International fund results depend on overseas markets, the portfolio and rupee movement. SEBI noted that MSCI Emerging Markets and MSCI World gained 24.7% and 17.2%, respectively.
• Debt fund returns depend on interest rates, credit quality, maturity and interest income, not the Nifty. Long-duration and liquid funds therefore behave differently.

This is also why the “40%” figure should not be presented as an equity-fund statistic. SEBI's table says schemes, and does not publish an asset-class or category split alongside it.

Why Sectoral Funds Can Show Bigger Swings

A diversified equity fund can hold several industries, allowing strength in one to soften weakness in another. A sectoral fund lacks that freedom. An IT fund must remain technology-focused even when IT is weak, creating bigger gains when the theme works and deeper falls when it does not.

Thematic funds can appear diversified because they hold several companies, but those companies may still depend on the same economic trend. For example, a consumption theme could hold retailers, lenders and consumer-goods companies, yet all may be affected by weak household demand. Investors should therefore examine the common risk connecting the holdings, not only the number of stocks.

Did Large-Cap and Diversified Funds Behave Differently?

Large-cap, flexi-cap and broad diversified funds spread money across more companies or market segments than a narrow sector fund. This can reduce the effect of one weak industry, but cannot remove market risk.

A large-cap fund still faced a 5.1% decline in the Nifty 50. A flexi-cap manager could move between large, mid and small companies, but the outcome depended on actual allocation and stock selection. Diversification controls risk; it does not promise a positive year.

Fund labels therefore describe the investment universe, not the return an investor will receive. Two flexi-cap funds may produce different results because one held more large caps while another owned more mid and small caps. The same category name does not mean identical portfolios.

One-Year Return, SIP Return and CAGR Are Not the Same

A point-to-point one-year return compares the NAV at the end of a period with the NAV at its beginning. For FY26, it asks what happened between the financial-year endpoints. A different start date can produce a different answer.

A SIP return is different because every instalment enters at a different NAV. Money invested near the end of the year was not exposed for the full year. SIP performance is generally measured using XIRR, which accounts for the date and size of each cash flow.

A CAGR, or compounded annual growth rate, converts a multi-year change into an annualised rate. If ₹1 lakh becomes ₹1.61 lakh in five years, its CAGR is about 10%, although individual years may differ.

That is why SEBI's annual-return table cannot tell an SIP investor their personal return, and one negative financial year cannot erase a fund's full history.

How Can a SIP Be Positive When the One-Year Fund Return Is Negative?

Suppose a lump sum entered at an NAV of ₹100 and the year ended at ₹95. It would show a loss. A monthly investor may have bought some units after the NAV fell to ₹90 or ₹92. Those instalments would be profitable after a recovery to ₹95, even though the financial-year return remained negative.

The reverse is also possible. A scheme can report a positive point-to-point return while an investor earns less because most of their money entered near a market peak. The fund's published return measures the product over a fixed period. XIRR measures the investor's experience using their actual cash flows.

Does a Negative One-Year Return Mean a Fund Is Bad?

No. A fund may fall simply because its category fell. The better first question is: How did it perform against the right benchmark and similar funds while taking comparable risk?

Suppose a fund fell 5% while its benchmark fell 10%. The fund still lost money, but it outperformed its benchmark by 5 percentage points. This suggests the portfolio protected capital better during that period.

It does not automatically make the fund good. Investors should check whether the outperformance is consistent across rising and falling markets and whether the benchmark is appropriate.

The reverse also matters. A fund gaining 8% when its benchmark gained 15% produced a positive return but underperformed by 7 percentage points.

What Is the Correct Benchmark?

A benchmark should resemble what the scheme is allowed to own. Comparing a small-cap fund with the Nifty 50 would be misleading because the two invest in different company sizes and carry different risks.

Investors should also check whether the comparison uses a Total Return Index, or TRI. A price index reflects price movement, while a TRI also includes dividends from index companies. Since a mutual fund receives dividends, TRI is the fairer comparison.

For an index fund or ETF, the goal is usually not to beat the benchmark but to track it closely. The gap between scheme and index returns is influenced by expenses, cash holdings and execution. Tracking difference measures the return gap, while tracking error shows how variable that gap has been.

How Should Investors Judge a Mutual Fund After a Bad Year?

Start with three time windows instead of one:

• Three years: shows recent consistency, but may capture only one type of market.
• Five years: is more likely to include strong and weak phases.
• A full market cycle: includes a meaningful rise and decline.

Then check rolling returns. These repeat the same period calculation across many starting dates, revealing whether performance was consistent or depended on one favourable window.

Investors should also examine benchmark and category performance, risk taken, portfolio concentration, expense ratio, fund-manager or strategy changes, and whether the scheme still matches their goal and time horizon.

Returns Alone Do Not Show the Risk Taken

Two funds can deliver the same five-year CAGR but give investors very different journeys. One may have fallen 35% during a correction, while the other fell 20%. The first required the investor to tolerate a much larger temporary loss.

Standard deviation indicates how widely returns moved around their average. Maximum drawdown measures the largest peak-to-low fall. Downside capture shows how a fund behaved when its benchmark declined; below 100 suggests it fell less during the periods measured.

These measures should be compared within the same category and period. A small-cap fund will normally look more volatile than a large-cap fund, so comparing their risk numbers without considering category can lead to the wrong conclusion.

What Does Full-Market-Cycle Performance Reveal?

A full-cycle review combines rising and falling markets. Investors can check how much of the benchmark's rise a fund captured, how much of its fall it participated in, and whether the long-term return justified the risk.

Rolling three-year and five-year returns make this test stronger. Instead of choosing one convenient start date, they show the outcome across many entry points. Investors can study the median result, the range between best and worst periods, and how often the fund beat its benchmark and category average.

What Should You Check Before Exiting a Mutual Fund?

Before reacting to one bad year, ask:

1. Did the fund underperform its correct benchmark and category, or did the entire segment fall?
2. Has the underperformance continued across several periods and market conditions?
3. Did the fund manager, investment process or stated mandate change materially?
4. Has the portfolio become unusually concentrated or taken more risk than expected?
5. Is the expense ratio reasonable for the value the fund provides?
6. Does the fund still fit the goal, asset allocation and time available?
7. Would an exit create tax or exit-load costs?

Investors should also separate a fund problem from a portfolio problem. A scheme may be performing reasonably, but the investor may own several funds with the same stocks or themes. In that case, the real issue is overlap and excessive exposure, not necessarily the quality of one scheme.

Rebalancing can be more useful than chasing the latest winner. If a market fall has pushed equity below the investor's planned asset allocation, the portfolio may require a different response than if equity was already far above the desired level. Any action should remain linked to risk capacity, goal date and the original investment plan.

A short-term fall may be normal for an equity fund meant for a long goal. The same fall can be serious if the money is needed soon. The decision should begin with the goal, not a one-year return number.

Investor Takeaway

The rise from 243 negative-return schemes in FY25 to 731 in FY26 shows that weak returns became much more widespread. It was not merely caused by the number of schemes increasing: the negative-return share itself rose from about 15.0% to 39.7%.

At the same time, this does not establish a mutual fund industry failure. Indian broad-market indices declined, sector outcomes differed sharply and each fund category responded to a different underlying market. One financial year is a useful warning to review risk, diversification and expectations, but it is too short to judge a long-term fund on its own.

The right lesson is simple: compare a fund with the right benchmark, study several time periods and check whether its strategy still fits the purpose for which you invested.