# Can a mutual fund investment drop to zero?

Source: https://koshex.com/blog/can-mutual-fund-investment-drop-to-zero · Published 2 October 2023 · 10 min read

In theory yes, but only if every share and bond the fund holds became worthless at the same time. What does happen is a deep fall: one small company index lost about three quarters of its value in 2008–09. Your money itself is kept away from the fund house's and the app's own accounts.

## Key takeaways

- A mutual fund unit is a share of everything the scheme owns, so it reaches zero only if every holding becomes worthless.
- NIFTY Smallcap 250 fell 76.0% from 2 January 2008 to 9 March 2009, which turns ₹1,00,000 into about ₹24,016 in that past index calculation.
- Part of a debt fund can lose most of its value if one bond defaults. A fund house may then use a segregated portfolio.
- The trust, the trustee, the custodian and the ban on pooling protect where your money sits, not what it is worth.
- If the app or distributor you used closes, your units stay in your name in your folio with the fund house.

In theory yes, but only if every share and bond the fund holds became worthless at the same time. What does happen is a deep fall: one small company index lost about three quarters of its value in 2008–09. Your money itself is kept away from the fund house's and the app's own accounts.

Two fears sit inside the question: that the value collapses, and that the money vanishes if the fund house or the app goes under.

## Can a mutual fund investment drop to zero?

A unit would reach zero only if everything the fund owns became worth nothing. A unit is one undivided share in the fund's assets, so its value moves with them. The NAV (net asset value, the price of one unit) is worked out daily: net assets divided by units outstanding.

So the question is really about the holdings. Each category's rules fix a spread of them.

- A large cap fund must keep at least 80% of its assets in large cap companies. AMFI ranks every listed company by size: ranks 1 to 100 are large cap, 101 to 250 mid cap, and 251 onwards small cap.
- A scheme's investment in the shares of any one company is capped at 10% of its NAV. Index funds (which track an index, a list of companies picked by fixed rules), [ETFs](https://koshex.com/blog/exchange-traded-funds) and [sector or theme funds](https://koshex.com/mutual-funds/categories/sectoral-thematic-funds) are exempt from that cap.

Be careful with that last rule. It applies per scheme, and it applies when a holding is bought. A share that rises in price can drift above 10% afterwards. So a fund may hold more than 10% in one company.

Here is what the cap means in rupees. This is an illustration, not a real fund. Say a diversified equity fund (one that invests in company shares) holds one company at 10% of its value. If that company's shares fell to zero and everything else stayed the same, ₹1,00,000 would become ₹90,000. It would hurt. It would not wipe you out.

A related fear is whether a fund's value can go negative, so that you owe money. The short answer is no, and the second FAQ below gives the reasoning.

## How much can a mutual fund actually lose?

A fund can lose a great deal. The category decides how much, and the worst dated case here is a small cap index.

NIFTY Smallcap 250 is an index of small company shares. Its price index, which leaves out dividends, closed at 4,039.14 on 2 January 2008 and at 1,081.62 on 2 December 2008, a fall of 73.2%. The fall carried into 2009. On 9 March 2009 the index closed at 970.03, which is 76.0% below the January 2008 close.

Put in rupees, ₹1,00,000 invested at the 2 January 2008 close would have been worth about ₹24,016 at the 9 March 2009 close. That is a past index calculation, not any fund's result or a forecast. It leaves out dividends, costs and tax.

A fall to about a quarter is deep, and it is still not zero.

Different categories carry different risk. SEBI makes every fund show a riskometer, a label checked every month. It has six levels: Low, Low to Moderate, Moderate, Moderately High, High and Very High. On 29 September 2026 every listed small cap fund read Very High. Most listed liquid funds read Low to Moderate, and most listed overnight funds read Low.

See the [small cap funds](https://koshex.com/mutual-funds/categories/small-cap-funds) and [overnight funds](https://koshex.com/mutual-funds/categories/overnight-funds) pages, and [liquid funds vs fixed deposits](https://koshex.com/blog/liquid-funds-vs-fixed-deposits). The full list of risks is in [what are the risks involved in mutual funds](https://koshex.com/blog/what-are-risks-involved-in-mutual-funds).

## When can part of a fund lose most of its value?

Part of a debt fund can lose most of its value when one borrower fails to pay. A debt fund lends money by buying bonds and similar paper from governments, banks or companies.

A credit rating is a rating agency's opinion on the likelihood of a debt being repaid in full and on time. SEBI's investor site says ratings can change quickly.

SEBI lets mutual funds buy only investment-grade bonds, rated BBB- or higher. A credit risk fund can still end up holding a bond rated lower if it is downgraded after purchase.

Rules also limit how much one borrower can weigh: at most 10% of NAV in the debt of one investment-grade issuer.

If a bond is downgraded below investment grade or defaults, the fund house may split it off into a separate segregated portfolio. This is optional and needs the trustees' approval. You get as many units in it as you hold in the main fund. Any recovery is paid out in proportion to your units. A few credit risk funds still carry a segregated portfolio from a past downgrade or default. The steps are in [what side pocketing means](https://koshex.com/blog/mutual-fund-side-pocketing-what-does-it-mean).

| What could go wrong | What the rules say |
| --- | --- |
| One company's shares collapse | 10% of NAV per company at purchase; some funds exempt |
| A bond defaults | Investment-grade buying only; issuer caps; optional segregated portfolio |
| The fund house gets into trouble | Trustees hold the assets in trust; a custodian keeps the securities |
| The app or platform you used closes | No pooling of your money; units recorded in your name |

### What a wound-up scheme looks like

In April 2020 one fund house closed six debt funds during the market turmoil of the pandemic. Investors could not redeem (sell) for months, and were then paid in instalments, in proportion to their units, as the bonds were sold.

The winding up was notified on 23 April 2020. The Supreme Court's order on it, signed in February 2021, records that the embargo on redemptions had then lasted over ten months. It also records what the trustees reported. On 15 January 2021, five of the six schemes had a higher NAV than on 23 April 2020. One was marginally lower. Cash proceeds of ₹9,122 crore were available to pay out in proportion to unitholders' interest in the assets. The court allowed payment in tranches without waiting for every asset to be sold.

## Is your money safe if the fund house shuts down?

A fund house does not own your money. A mutual fund is a trust registered with SEBI. A sponsor sets up the trust. A trustee company holds the fund's property in trust for the benefit of unitholders. The fund house, formally the asset management company or AMC, manages the money. A separate custodian, registered with SEBI, keeps the shares and bonds safe.

The trustees appoint the AMC with SEBI's approval, check its systems, and must report its breaches to SEBI.

The AMC also has capital of its own, called net worth. Under one route, the sponsor must keep it at ₹50 crore or more at all times, and the trustees review it every quarter. That capital is separate from the scheme's assets. Scheme assets sit with the trustees and the custodian, so they are not the fund house's money to pay its debts.

The trustee company can end an AMC's appointment with the approval of a majority of its board. SEBI can direct it, and so can a resolution of at least 75% of unitholders. Any change of AMC needs SEBI's prior approval.

A fund house can also be sold. If it is, SEBI and the trustees must approve first and you are told in writing. You may leave any of its funds at NAV without an exit load. An exit load is a fee some funds charge if you sell within a set time after buying. The full picture is in [what to do if a mutual fund merges or changes hands](https://koshex.com/blog/what-should-you-do-in-case-of-a-mutual-fund-merger).

### What happens if a scheme is closed

A scheme can be wound up on three grounds: the trustees decide it must be, 75% of unitholders pass a resolution, or SEBI directs it. The trustees must give notice within one day to SEBI and in newspapers. When the trustees decide, they need the consent of a simple majority of unitholders voting, on one vote per unit, or the scheme reopens.

From the notice, the scheme stops issuing and redeeming units, and its units are listed on a stock exchange. The trustees sell the assets in unitholders' best interest. Liabilities are paid first. Then, after winding-up expenses, unitholders are paid in proportion to their interest in the assets on the day the decision was taken.

A winding up is not a loss in itself. You are paid your share of whatever the assets fetch. What you lose is the freedom to redeem at will until the assets are sold. The sale value can be lower than the last NAV.

## What happens to your units if the app or distributor closes?

Your units stay in your name, because the app never held them. Your money goes from your bank account straight to the fund. When you sell, it comes straight back to your registered bank account. Distributors (registered intermediaries that help you buy and manage funds), advisers, platforms and brokers may not pool investors' money or units. They also cannot take SIP or lumpsum mandates in their own name.

Your units are recorded in a folio, your account with the fund house, by its registrar. A registrar is a SEBI-registered company the fund house appoints to keep these records. A consolidated account statement covers every month in which you transacted and is issued by the 15th of the next month.

If an app or distributor closes, your investment stays where it is. You can still check and redeem it through the fund house, its registrar (CAMS or KFintech) or MF Central. MF Central is a common platform. It lets you buy, sell and switch across all fund houses and see your holdings and a capital gains report.

A distributor carries an AMFI Registration Number (ARN), shown on the application form, and Koshex holds ARN-154632. As a distributor, Koshex never holds your money. Koshex customers can redeem (sell) units on Koshex.

## Is a fall the same as losing your money?

No. A fall changes the value shown, which is today's NAV multiplied by the units you hold. Your units stay yours until you redeem them. Selling at the low turns a fall in value into money lost.

When you do sell, the money must reach you within 3 working days of the redemption. For schemes with at least 80% in overseas investments, the limit is 5. A fund can restrict redemptions only in a systemic crisis, such as a market-wide failure. The limit is 10 working days in any 90 calendar days. Even then, requests up to ₹2 lakh are not restricted. [Open-ended funds](https://koshex.com/blog/what-are-open-ended-mutual-funds-benefits-risks-and-how-they-work) have their own article on that limit.

Koshex, as a distributor, talks you through sharp market falls before you redeem. It also reviews your holdings over time and flags changes (a fund's category, risk or ranking shifting). Whether to sell in a fall has its own article: [should I redeem my funds since the markets are down](https://koshex.com/blog/should-i-redeem-my-funds-since-the-markets-are-down).

The protections described here cover the structure that holds your money, not its value. To measure a fund's risk, read [five ways to measure mutual fund risk](https://koshex.com/blog/5-ways-to-measure-mutual-fund-risk). To cut it, read [top strategies to reduce mutual fund risk](https://koshex.com/blog/top-strategies-to-reduce-mutual-fund-risk). For SIPs, see [is a SIP safe](https://koshex.com/blog/is-sip-safe).

## Frequently asked questions

### Can a mutual fund investment drop to zero?

In theory yes, but only if every share and bond the fund holds became worthless at the same time. A unit is a share of the scheme's assets, and its value moves with them. Rules on category and on single companies spread the holdings. What does happen is a deep fall: the NIFTY Smallcap 250 price index closed 76.0% below its January 2008 level on 9 March 2009.

### Can a mutual fund's NAV be negative, or can I lose more than I invested?

No. No rule lets a fund ask you for more money. Your units are a share of what the fund owns. SEBI limits borrowing to short-term needs of up to 20% of the fund, for up to six months. Total exposure is capped at 100% of net assets. The most you can lose is what you put in.

### Can a liquid fund go to zero?

A liquid fund holds debt, so it can lose value if a bond it holds defaults. The fund house may then use a segregated portfolio. On 29 September 2026 most listed liquid funds read Low to Moderate on the riskometer, which is not the same as risk-free. Our article on liquid funds and fixed deposits covers whether a liquid fund can lose money.

### Does SEBI protect my capital?

No. SEBI regulates the structure that holds your money, not the value of your units. Every fund's documents warn that its value can go up or down. They add that there is no assurance it will meet its objective and that you can lose money, including what you put in. SEBI's Investor Charter also says not to fall for the promise of assured returns.

### Is my mutual fund insured like a bank deposit?

No. Deposit insurance from DICGC covers bank deposits, including recurring deposits, up to ₹5,00,000 per depositor per bank. Mutual fund units are an interest in a scheme, not a deposit, so DICGC's cover does not reach them.

### What happens to my investment if the app I used shuts down?

Your units are recorded in your name by the fund house's registrar, not held by the app. If an app or distributor closes, your investment stays where it is. You can still check and redeem it through the fund house, its registrar (CAMS or KFintech) or MF Central. Koshex customers can redeem (sell) units on Koshex.

### Can one company's collapse wipe out my fund?

SEBI caps how much of a fund can go into one company: 10% of the fund's value, for most equity funds. The cap applies when a holding is bought, so a share that rises can later be more than 10%. Index funds, ETFs and sector or theme funds are exempt. In an illustration with one holding at 10%, a fall to zero turns ₹1,00,000 into ₹90,000 if everything else stays the same.

### Where can I complain if something goes wrong with my fund?

Complain first to the fund house. If that does not fix it, file a complaint on SEBI's SCORES portal. If you are still unhappy, SEBI's online dispute resolution portal (SMART ODR) offers conciliation and arbitration.

*This article explains how things work; it is not advice to buy or sell any investment. Mutual fund investments are subject to market risks, read all scheme related documents carefully.*