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What if I wake up and my investment is worthless? This is a frightening thought for any investor. How am I going to respond? What happens if it turns negative? I am aware of this worry as an investor.
The idea itself is stressful, even though I am aware that the likelihood of either of these occurring is negligible.
Let's divide this question into smaller segments to provide a thorough explanation:
Can My Investment become zero or even Go Negative?
Any investment can theoretically be reduced to zero. Therefore, if you have invested your money in stocks and if thar particular company fails, your stock investments in that company lose all of their value. Investing in stocks carries that risk.
However, unless the world truly collapses, I don't see this occurring if you have invested in “Mutual Funds”! Even though the return on your investment (ROI) may be negative, your investment can't turn negative, which would indicate you owe someone money. For now, let's understand why it will not happen in mutual funds.
That being said, I am not aware of any instance in mutual fund history where a fund portfolio's value has fallen to zero. When the value of all the securities and assets that a mutual fund portfolio has invested in falls to zero, the portfolio's value will also drop to zero.
Let us see an example.
There is one very high-risk small-cap equity fund that invests 80% in stocks of small-cap companies and 20% in AA-rated bonds.
For this fund's value to drop to zero, all stock prices must drop to zero, which implies that all small businesses must close and bond investment values must drop to zero (which is mathematically impossible unless the nation's economy collapses).
As a result, even though the answer to the question was yes, there is very little likelihood that it will occur.
What if my investment drops considerably, say by 50% of Its Value? What should be done?
It's more frightening since, for certain investors, a market crash and an unbalanced investment portfolio may actually occur today! Let's assume this situation and examine the most effective solutions:
- Don’t Panic and sell during the market crash
Imagine realizing that your Rs. 10 lakhs mutual fund investment is now worth Rs. 4 lakhs! Panic is unavoidable. However, I want you to consider a few things before start selling in market crash:
- The real book loss and the notional loss are different: You only have a notional loss, or a loss on paper, if you haven't liquidated your investments. It implies that this loss may be minimized when the markets rebound. In the long term, you can make money. Conversely, if you sell your investments immediately, you will record the loss and be unable to recover it regardless of market conditions.
- Opportunity Loss: Assume for the moment that you made an investment in these funds in 2008 or 2018 and maintained a long-term perspective while holding onto them through market fluctuations. Additionally, you would have missed the chance to make money by holding onto your investment for a longer period of time if you sold now.
Note that historically, markets have always recovered from catastrophes and crises, and it may not be beneficial to sell during a downturn.
- Evaluate Your Investments:
Before you make any informed decisions, take time analysing all of your investments. Examine the fundamental concepts of the investments or assets you have bought. For example, if you have invested in an equity fund, assess the fund's portfolio holdings to determine whether it can endure the current market volatility.
You can hire an investment manager to help you in determining which investments are worth holding onto and which ones you might sell when the market opportunity presents itself.
- Never Forget Your Investment Objectives:
Remember why you initially invested in the fund, regardless of how things are going right now. Long-term investors with financial objectives that are more than five to ten years away typically like equities mutual funds. If that describes you, then if your assets have solid fundamentals, stick to your plan.
- There will always be Market Volatility:
You have to keep in mind that markets are, have been, and always will be volatile. It is the basic nature of the market. The reason for this volatility could be anything such as financial performance of companies, the country’s performance, Economic factors, Political, geopolitical factors, valuations, market sentiments/demand-supply etc.
- To Reduce Risk, Diversify Your Investment Portfolio:
You need to start looking at investment options that can help you diversify while taking advantage of the low pricing if the lack of diversification is negatively affecting your portfolio.
Choose mutual fund schemes that are not interdependent. A strong correlation between the schemes is not recommended to diversify the portfolio. This implies that the value of one investment shouldn't be impacted by changes in the value of your portfolio.
By doing this, you will lower your portfolio's total risk and increase your chances of recovering your losses if the markets begin to show signs of optimism.
To Sum Up
The fear of investments going to zero is real and common, but remember it is highly unlikely in the case of diversified mutual funds. Temporary declines are part of market cycles, and long-term disciplined investing supported by diversification and patience has historically created wealth.
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