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

FAQs

How Mutual Funds Perform During Market Crashes | Kotak Securities? ›

The underlying securities of mutual funds comprise stocks from different companies. Due to this, mutual funds offer you the benefit of diversification. However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks.

Timing the market is not easy. 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.

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.

Money held in an interest bearing account like a money market account, a savings account or others is generally safe from losses stemming from a stock market decline. Bonds, including various Treasury securities can also be a safe haven. That said, beyond cash-type accounts nothing is totally safe from losses.

Mutual funds give flexibility to investors to organize their investments according to their convenience. For example, you get a variety of choices like SIPs, SWPs, STPs, sweep facility etc that can customize investing to your specific needs.

However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. Performance improves only when stocks recover lost ground.

However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.

Keep earning money

This may seem obvious, but it's best to avoid withdrawing large amounts from your portfolio during a recession. When stock values have declined, selling shares to cover everyday living expenses can meaningfully eat into your portfolio's long-term growth potential.

If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.

Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.

Do I lose all my money if the stock market crashes? ›

No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.

A decrease in implicit value, for instance, leaves the owners of the stock with a loss in value because their asset is now worth less than its original price. Again, no one else necessarily receives the money; it simply vanishes due to investors' perceptions.

Your investment is put into various asset options, including stocks. The value of those stocks is directly tied to the stock market's performance. This means that when the stock market is up, so is your investment, and vice versa. The odds are the value of your retirement savings may decline if the market crashes.

Are mutual funds safe? All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.

Mutual fund custodians are responsible for securing and managing the securities held by a mutual fund. While a fund's portfolio manager makes trading decisions, the securities owned by the fund are held by the custodian and not by the fund itself.

The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk. Unsystematic risk is risk that can be diversified against.

There is no better time to start investing. It is very difficult to time the markets and although the markets are due for a correction, it would not be wise to wait further. Also, when it comes to SIPs, there is not much merit in timing the markets. We would suggest you invest in different mutual fund categories.

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.

If you are betting on the markets to eventually bounce from lower levels, you are better off buying an index fund or an index ETF. You can participate in the market bounce without taking specific risk and at a much lower transaction cost.

The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.