Is your investment 'dead money'? You might have the capital, but you won't be able to spend it.

Dead Money Investment Return: Do you know what 'dead money' is? Have you made an investment that has been running for a long time but hasn't yielded any returns yet? Let’s understand what dead money is.

What is Dead Money: In the world of investing, 'dead money' is a risk that investors often overlook. It refers to an investment where capital remains tied up but fails to generate good returns over a long period. Expert Hemant Rustagi explains that if a fund has been underperforming for a long time, it can become 'dead money' in your portfolio.

'Dead money' doesn't necessarily mean the investment is incurring a loss. Often, the principal amount remains safe, but the returns are negligible or non-existent. Investors might feel that since their capital is safe, there is no major issue; however, the real loss lies elsewhere.

How do low returns result in a loss?

When your money remains tied up in a fund that isn't delivering good returns for an extended period, you miss out on other, better investment opportunities. This is known as 'opportunity cost'—meaning, had your money been invested in a better option, it could have generated higher returns. Therefore, merely keeping the capital safe isn't enough.

You don't need to immediately label every underperforming fund as 'dead money' and sell it off. It is important to monitor the fund's performance over a period of time. If a fund underperforms consistently for 4, 6, or 8 quarters—roughly 1 to 2 years—it warrants attention.

It is also crucial to compare its performance with other funds in the same category. If other funds are delivering good returns while your fund consistently lags behind, it could be a cause for concern.

When should a fund be considered 'dead money'? If a fund consistently underperforms for about four to eight quarters while other funds in the same category are delivering better returns, investors should review their portfolios. In such a scenario, one might consider removing the fund from the portfolio, treating it as 'dead money'.