Why do mutual funds take longer than stocks to recover?

I invest in stocks and mutual funds. What I have noticed is that after a correction in the market, mutual funds take a lot of time to regain the original ground as compared to the time taken by stocks. Why are mutual funds so slow to show gains?
- Nishanth Chitlur

Yes, mutual funds are a relatively steadier version because of greater diversification and in your stock portfolio, you may have fewer stocks, possibly 10-15 stocks. Maybe you are a good stock picker and they are able to recover faster or maybe you are a bad stock picker but so far, your experience revolves around the limited universe that you have invested in.

When you invest in a mutual fund, you are generally going for diversification in a programmed manner. I would say that with mutual funds, not just during the recovery but also during the decline, you will see a steadier decline instead of a free fall because of the diversified nature of these funds. You also have some mutual funds that fall freely and make a big comeback. Likewise, you have stocks that fall very dramatically and then, they make a comeback very sharply. So, it entirely depends on the character of the portfolio and their level of diversification.

But largely, I agree with you that sometimes mutual funds may take longer to make a comeback as compared to narrower or concentrated portfolios.

This article was originally published on October 01, 2020.