Turn Market Crashes into Equity Fund Opportunities
In September 2024, India’s stock market benchmark, the Sensex, reached a record high of 85,000 points. However, due to a combination of international and domestic factors, it gradually declined to 77,500, marking a correction of approximately 10%.
Since then, the market has shown signs of recovery, but it continues to oscillate between gains and losses.
In such a volatile environment, how can investors navigate these fluctuations to make profitable investment decisions? Could this be the perfect time to seize opportunities and fine-tune investment strategies?
The ups and downs of the stock market are directly reflected in the NAV (Net Asset Value) of equity mutual fund schemes.
Market crashes often lead to a drop in the NAV of equity mutual funds, creating an opportunity to buy funds at lower prices. As the market recovers, these funds may see significant returns, making it an ideal time for long-term investments.
Investing when the NAV is low can lead to substantial profits as the market recovers. During the recent market correction, the NAV of various equity mutual funds dropped by 0.80% to 12.40%.
India offers nearly 20 types of equity mutual funds, ranging from large-cap and mid-cap to small-cap funds. When the market experiences a significant dip, some funds see sharp NAV declines, while others show more resilience.
So, in such situations, is it more profitable to invest in funds that experience a steep NAV drop or those that remain relatively stable? How can investors make the right choice without second-guessing their strategy?
We analyzed the impact of the COVID-19 pandemic on Indian mutual funds. Between January and March 2020, the Indian stock market experienced a sharp decline.
Our analysis examined the extent of NAV declines across large-cap, mid-cap, and small-cap equity funds during this period and how long each fund category took to recover.
For instance, in the large-cap segment, Nippon India Large Cap Fund saw a significant drop of 32.3%, while JM Large Cap Fund experienced a relatively modest decline of 11.9%. Similarly, in mid-cap funds, ICICI Prudential Mid Cap Fund dropped 32%, whereas Axis Mid Cap Fund limited its fall to 18%.
In small-cap funds, Aditya Birla Sun Life Small Cap Fund declined by 34.3%, while Bank of India Small Cap Fund fell by only 16.1%.
Why do some funds witness steep declines while others remain relatively stable? It all comes down to the fund’s portfolio composition.
The extent of an equity fund’s NAV drop is directly influenced by the volatility of the stocks within its portfolio. If the stocks in the portfolio experience sharper declines, doesn’t it naturally follow that the NAV will face a similar impact?
JM Large Cap Fund, which saw a modest 11.9% drop, recovered within four months. Similarly, Axis Mid Cap Fund, with an 18% decline, also bounced back in four months, while Bank of India Small Cap Fund, which experienced a 16.1% dip, recovered in just three months.
In contrast, funds with steeper declines took significantly longer to recover. Nippon India Large Cap Fund, which dropped by 32.3%, required nine months to regain its footing.
ICICI Prudential Mid Cap Fund, after a 32% fall, took six months, and Aditya Birla Sun Life Small Cap Fund, with a 34.3% dip, needed seven months to recover.
Funds with less volatility in their portfolio, such as large-cap and mid-cap funds, tend to recover faster. It’s crucial to choose funds that exhibit less risk and bounce back quickly during rallies.
While funds with sharper NAV declines may offer higher recovery potential, it’s essential to consider your risk tolerance. Funds with less volatility often recover quicker and provide more stability in the long run.
Are these not the hallmarks of strong equity funds? At the same time, isn’t it crucial to align fund selection with your risk tolerance and investment horizon? After all, a tailored approach ensures your portfolio thrives even in challenging market conditions.
Moreover, the decline in equity funds due to market downturns is not permanent; it is only temporary. While individual stocks may take longer to recover after a market drop, certain mutual funds can bounce back in a much shorter time.
Equity funds typically invest in a diversified portfolio of 30-80 companies. Since new investments, like SIPs, continuously flow into the fund, it creates an opportunity to invest more during the downturn.
Isn’t this one reason why mutual funds recover faster than individual stocks?
When you buy and sell individual stocks, transaction fees, capital gains taxes on short-term gains, and other charges can reduce profits.
In contrast, mutual fund companies handle buying and selling of stocks on your behalf, which reduces these expenses. Don’t fund companies also benefit from lower transaction costs and avoid paying capital gains taxes on trades?
Historical data shows that while the NAV of equity mutual funds may fall during market declines, they generally recover within a set period. So, should investors panic and sell their units during a market drop? Absolutely not!
In fact, isn’t it more profitable to invest more in strong equity funds that recover quickly during market rallies? Those with the patience to hold until recovery can invest in funds that take a bigger hit, knowing that long-term profits can follow.
If you need guidance in making the right investment choices, should you hesitate to consult financial advisors who can offer expert assistance?
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