Investors evaluating actively-managed mutual funds should not only focus on a fund’s ability to earn higher returns than the benchmark but also on how much downside protection it provides. In other words, the fund’s return should fall less than the benchmark’s when markets decline.
Protecting downside is important because a steep fall, especially in the initial years of investment, can eat into the capital and affect the ability of the portfolio to compound and grow. Higher the fall, greater is the percentage gain required to make up the losses.
