How Mutual Funds Perform During Market Crashes | Kotak Securities (2024)

FAQs

What to do with mutual funds during market crash? ›

Markets will reward you for not exiting during a crash

Mutual funds are long-term investments. If you stay invested, you can take advantage of rupee-cost averaging. Markets have rewarded those who have not pulled out their investments during crashes.

You can't predict markets.

Nobody can predict the market movements. Hence, instead of focusing on timing the market, one should be disciplined and should keep on investing in equity mutual funds irrespective of the market fluctuations. In the long term, these short term fluctuations do not affect your investments.

Do I lose all my money if the stock market crashes? While your stock holdings will likely take a hit in value during a stock market crash, most stocks generally retain a portion of their value. Each crash is a bit different, and the impact on various stocks and market sectors can vary widely.

During normal times, trading activity and liquidity provision by mutual funds is negligible compared to other traders at around 4% of overall activity. Nevertheless, for the two intraday market- wide crashes in our sample, price recovery took place only after mutual funds moved in.

If you have money in mutual funds, using some of it to pay off debt, especially debt with high interest rates, might seem like an attractive option. But cashing in your mutual funds isn't always the best way to become debt-free, and depending on how you hold those funds, you could end up with a big tax bill.

A far better strategy is to build a diversified mutual fund portfolio. A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline.

However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.

Times to Sell

If the fund manager has changed. If the investment plan and strategy of the fund has been altered. If the fund has been consistently underperforming. If the fund sees too large a growth to fulfil the goals of any investor.

The right time to redeem mutual funds depends on your financial goals and the performance of the fund. You should redeem your units when you are close to achieving your goal or when the fund is not meeting your expectations.

Buy Bonds during a Market Crash

Government bonds are generally considered the safest investment, though they are decidedly unsexy and usually offer meager returns compared to stocks and even other bonds.

Is it smart to invest during a market crash? ›

During a recession, you might be inclined to give up on stocks, but experts say it's best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns.

While it appears that you're losing money during a market crash, in reality, it's just your stocks losing value. For example, say you buy 10 shares of a stock priced at $100 per share, so your total account balance is $1,000. If that stock price drops to $80 per share, those shares are now only worth $800.

While market crashes inevitably impact mutual funds' performance and pull them down, as an investor, you need to remain patient and avoid exiting your investment. If you redeem your investment during a market crash, you essentially convert your notional losses into actual ones.

When the stock market is crashed, the investors face huge losses due to the falling prices of the shares they have purchased. Mutual fund too invests in the stocks and shares traded in the exchange, and thus the values of the funds are also reduced.

In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.

So, if you notice a loss in your mutual fund portfolio, it is best to keep yourself calm instead of making a big decision. The aim should be a long-term investment plan while dipping into mutual funds investment, as it works well. Also, build a mutual fund portfolio that aligns with your long-term financial plan.

Money Market Mutual Funds

Money market funds are ultra low-risk mutual funds that invest in securities with short maturity periods, making them among the lowest-risk investments available outside of government bonds.

If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.