Mutual fund investors, especially those who entered the market after 2020, are now facing an unfamiliar situation. For investors who entered the market post-Covid, investing in mutual funds looked so easy, with little worry about drawdowns and consistent annual profits between 2020 and 2024. Investors buying mutual funds had a good experience, which gave them confidence to significantly scale up their investments based on near-term past performance.
This ramp-up happened very quickly as they added more money and generated returns for four successive years. But in 2025, the experience seems to have reversed for many. Fund investing, which they once saw as easy to manage independently, suddenly looks very discomfiting and complex in 2026. Investors feel unsure if their portfolios are constructed correctly, whether their choices carry good long-term prospects, and doubt their capability to generate returns.
However, this comes at a time when they have aggressively invested their savings and built significantly large mutual fund portfolios. The portfolios had grown without the right supporting investment principles at play. The vulnerability of their portfolios was suddenly exposed, causing distress.
Weak portfolio defence exposed
The primary concern for portfolios, whether managed DIY (do-it-yourself) or with professional advice, is the lack of adequate defence. Investors started the calendar year aggressively by hoping it would be decent for equities. However, March turned things upside down and exposed the vulnerability of several mutual fund portfolios. Investors are experiencing a shake-up when they were least prepared.
First, their fresh investments in precious metals dropped sharply. Then, equity fund portfolios began to erode. In the first quarter of 2026, the Nifty 50 total return index (TRI) lost 14%, while individual funds saw a sharp dip in values. Most mutual fund portfolios went deep into the red, SIPs turned negative and investors lack visibility of a path toward profits. When the markets fell in March, several mutual fund portfolios declined more than their benchmarks. This is a clear signal that such portfolios aren't as robust and resilient as expected.
Risky choices sowed the seeds
Let us understand what caused this crisis of confidence among mutual fund investors. First, they pursued a rather narrow approach to mutual fund investing that did not adequately build-in risk management. The fund choices were oversimplified, often limited to just one or two options. Those doing indexing ended up buying an overvalued index like the Nifty Next 50 and allocating too much capital to it. Thematic investing was also practised very aggressively by many DIY investors and the spate of NFOs in themes led to significant misapplication of capital post-2024.
The aggressive fund investing in 2024 and 2025 involved extreme risk-taking without supporting prospects of adequate rewards. All this led to a serious portfolio composition problem for many. The portfolio construction done by investing aggressively is becoming vulnerable to extreme volatility and sharper market swings. The seeds for the present crisis in many portfolios were actually sown in 2024 and 2025. The sharp market fall during the Iran war and the aggressive FII selling in March merely exposed portfolios constructed without proper risk management. The market crash in March merely revealed what heightened volatility could do, and exposed vulnerabilities in several portfolios.
This caused a huge crisis of confidence. Consequently, confidence among post-Covid investors is declining, and the sentiment now is to somehow recover losses and move money to safer assets. Several investors are doubting their SIP choices, even while hoping to recover their capital and exit the market. What caused this sudden shift in investor sentiment just three months into 2026? Performance or the lack thereof, is causing this surge in negativity and loss of investor confidence.
Why a portfolio reset is vital
The surge in outflows from mutual funds is not helping matters, either. But the seed for this crisis was sown a few years ago. The mutual fund industry witnessed money chasing small-cap and mid-cap funds through 2024 and 2025. For months, flows went mainly into small-cap and mid-cap funds. Money also chased flexicap funds, which have not performed well during this sharp correction either. What signalling do we need to pick up now?
When your portfolio of mutual funds falls more than the index, that is a clear warning signal that your investment strategy needs to be revisited, reviewed and renewed. Ironically, even ETF investors are experiencing sharp drawdowns due to poor portfolio composition. So what should investors do now? A portfolio reset is the need of the hour. Investors need to ensure their fund portfolios have the right balance, a stable structure, and adequate alignment with their risk appetite.
This will require definitive changes in fund portfolios. Once the portfolio reset is achieved, investors must further build their portfolio to suit the emerging economic context, taking appropriate risks and sensibly allocating capital to different assets. Going forward, investing needs to be stable, precise and perfectly positioned to win. It is time for fund investing to get more serious.
Shyam Sekhar is chief ideator and founder of ithought Financial Consulting Llp.