What Steps To Take When Losing Money In Mutual Funds

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What Steps To Take When Losing Money In Mutual Funds
Vishav - 19 March 2020
Equity mutual funds have been the go-to financial instruments for the last several years for investors who seek higher returns compared to other traditional financial products. However, with the coronavirus crisis taking over the globe, stock markets have fallen sharply, correcting by over 30 per cent over the last two weeks or so. This has also made a significant dent to the mutual fund returns of all investors irrespective of which mutual fund they had opted for. If one looks at the value of their investments on day-to-day basis, they would find the Net Asset Value, or NAV, falling every day and their profits, or even the principal amount, getting washed away.

Since equity mutual funds are market-linked, it's natural that these funds get affected when the market goes down. And while this creates a lot of concern and raises several questions among investors, one should avoid taking a decision in panic that may do more harm and make a bad situation worse.

First and foremost, one must avoid redeeming their units in a bear market. This would only turn one's notional losses into real ones. Some investors think they can get their money out of a mutual fund and then invest again at a lower price as markets are falling. However, this mostly works out only in theory and more often than not, they end up selling when prices are low and invest at a price higher than what they sold their mutual funds for. This hurts the long term wealth creation process.

Instead, one should keep calm and understand why the markets are performing badly. The stock markets usually perform well over a long period. In the short term, volatility causes the price to go up and down. While you can lose money in mutual funds due to short term market disturbances, if you look at the long term, instances of negative returns drastically reduce.

One should also check their mutual fund’s performance with other mutual funds to understand if only their fund is doing badly or it's a downtrend for all such funds. Currently, every mutual fund has seen sharp erosion of their NAV and that is not because of the quality of the fund, but due to a larger market correction. As market recovers, the notional losses would also reduce and in the long run, will again turn into profits.

Another important thing to note is that with such sharp corrections, one can buy more units of their mutual funds for the same SIP amount. This would translate to bigger recovery and more profits when the market recovers. So one must avoid stopping their SIPs when markets are performing badly but see it as an opportunity for long-term wealth creation.

Last, one should not impulsively invest more in equity to make most of the market crash. Instead, stick to your asset allocation according to your risk profile.

With some calm attitude, sticking to your long-term goals and keeping these things in mind, one should be able to sail through this market low and come out on top when things get better.
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