Mutual funds are one of the most popular investment choices in India today when it comes to wealth creation and appreciation! The net assets under management (AUM) of the Indian mutual fund industry reached a record high of Rs. 39.33 Lakh Crores in August 2022.
However, a certain degree of risk is involved when we put our hard-earned money in market-linked financial instruments like equities and mutual funds. And, this leads us to an obvious question – can the value of my investment drop to zero?
The answer depends on which financial instrument we choose to fulfill our financial goals.
Risk Levels: Equities Vs Mutual Funds
If we invest in equities (shares), the investment value may yield zero returns. For instance, when the shares of a company in which we invested fall, we may not earn profit.
However, when we invest in a mutual fund, the possibility of zero yields is thin! Now, why so? Let us explore.
Unlike equities where money is invested in the shares of one company, in mutual funds, the investment involves shares of various companies.
In other words, a mutual fund is an investment vehicle that pools assets from different investors to invest in a basket of securities. These include bonds, stocks, money-market instruments etc.
These shares are chosen by fund managers of fund companies to meet the risk levels and financial goals of different investors. Hence, a mutual fund could lose value only if all investments in its portfolios turned to zero.
Let’s understand this better with the help of an example.
Suppose, we have invested Rs. 10,000 in a high-risk small-cap fund. A small-cap fund is a fund that invests most assets in the shares of small-cap companies.
Now, let’s say that our small-cap fund invests 75% of the pooled money in the stocks of small-cap companies and the remaining 25% in blue-chip stocks.
The value of this small-cap fund will drop to zero only when each of these small and large-cap companies goes bankrupt together!
Hence, the value of mutual fund dropping to zero is a near-impossibility.
What Should I Do If the Value of My Mutual Fund Investment Drops?
As an investor, it is challenging to see the value of our investment going downhill. However, despite the odds, the value of mutual fund investments can drop.
After all, a mutual fund is a market-sensitive financial instrument and markets are uncertain. And thus, the best approach is to prepare ourselves for the worst by determining a plan of action.
Below is a list of tips that will help us when the value of our mutual fund drops:
- Avoid Selling in Panic
First and foremost, we must stay away from panic selling. However, often we feel tempted to sell our investments when we see their value dropping significantly. Here, it is crucial to understand that this loss is only a notional and not an actual loss. However, if we choose to book that loss, we will convert it into an irreversible actual loss.
Hence, it would be wise to wait and see if the market rebounds and offers corrections. No market can remain even at its lowest forever. It may take some time, but the stock market always rewards investors for their patience. Thus, we should wait for the mutual fund to revive instead of selling it off under market pressure.
- Diversify Your Portfolio Today, Leverage Benefits Later
In the world of investment instruments, portfolio diversification can greatly benefit us. As they say, we should never put all our eggs in the same basket. If we fail to diversify our investment portfolio, then our money remains invested in one type of fund. This can be potentially risky. If the fund fails, we lose all our money in one go.
As mutual fund investors, we should always balance our investment portfolio with financial instruments which share no correlation. This helps us spread our portfolio risk. In this scenario, the chance of all investments failing at once is bleak. Hence, even if some investments lose value, others would continue yielding returns.
- Remember the Investment Objectives
Markets are uncertain and will always cause fluctuations in the value of mutual funds. However, we must keep our financial goals in mind even when the market undergoes ups and downs. For instance, long-term investors who wish to appreciate wealth over time, should not give in to short-term market fluctuations. In the long run, the returns on our investment will average out short-term corrections of the market. In turn, our returns will be relatively higher than returns under a shorter time horizon.
- Monitor and Study the Investments
When the value of our mutual fund investment drops, we must sit down and analyse it. We must check the prospects of the companies that are a part of our fund portfolio. This will help us gauge if our mutual fund can bear the market storm and overcome it in the long run.
However, we must understand that such an analysis requires a certain skill set and aptitude. And in case one is not sure how to go about it, seeking expert consultation will help.
The value of a mutual fund investment dropping to zero is a near-impossibility given its very nature and the fact that it is managed by a team of experienced professionals.
In other words, an investment in a mutual fund can turn to zero only when all the securities it is made up of also lose their value simultaneously.
Such a situation is highly unlikely as not every market instrument can fail at once. On top of this, it is also worth remembering that mutual funds are monitored and regulated by the Securities and Exchange Board of India (SEBI).
Thanks to SEBI’s regulations, the mutual fund is a popular and relatively risk-free instrument even for newbie investors.
If you wish to invest in mutual funds, then sign up with Koshex today and say yes to a very enriching investment journey.
What are blue-chip mutual funds?
Blue-chip mutual funds are those which invest a majority of their assets in the stock of large-cap companies. These funds are less exposed to market risk as the blue-chip companies come with certain market credibility.
What is the NAV of a mutual fund?
NAV refers to the Net Asset Value of a mutual fund and represents its market value.