8 mins read . 27 Jun 2023
It often happens that you buy a fund and then realize that the NAV has fallen below your buy price. A small fall is par for the course, so you would not be overly worried. However, there are cases, when the NAV may have fallen by 20-25%. This did happen during the technology book of 2000 or the infrastructure boom of 2007. Many mutual funds floated schemes with such focused themes and the investors also latched on to it. When the markets tumbled, most of these funds saw their NAVs depleting anywhere between 20% and 50%. The million-dollar question is; how do you handle this kind of situation? You obviously cannot be smug, nor can you afford to panic about it. Let us understand how investors can adopt a rational approach to such a situation when the NAV of the fund has gone way below the purchase price.
As investors, this is one of the most important things we tend to forget. The general belief is that strategy must necessarily involve action; be it buying, selling, or hedging. One of the things to remember here is that even doing nothing is a strategy and it is quite often a very potent strategy. Many times, the most important decision that you have to make in the financial markets is doing nothing. For example, the fund NAV could be down purely due to temporary corrections or due to minor bouts of selling. In such cases, the answer is to do nothing. It is important that you don’t start creating strategies where none is required. There is always an element of market volatility that you must provide for. Of course, it is critical to know when the individual is not required to do anything.
This is an opportunistic but more complicated approach and is quite popular among larger investors in mutual funds. The question here is; if you are sitting on notional losses, should you convert them into actual losses? That depends on whether you have short-term gains during the year, or brought forwards from the previous years. This is called tax harvesting and the way it works is that you can book a loss on the equity fund and repurchase it after a few days. You do not lose too much on an effective basis. However, the loss you have booked on this equity fund can be written off against other capital gains and thus you reduce your total capital tax liability. What if you don’t have any profits in this year? You can still book these losses and carry forward for a period of 8 years; which is absolutely legitimate under the Income Tax Act. This strategy is more popular among large investors.
In fact, this is the first step when you are clear that the market is likely to see deeper losses for a sustained period. How should you restructure your mutual fund portfolio? Firstly, review your overall asset allocation and take a call on whether you should temporarily park your money in a debt fund or a liquid fund, or should you stick to your equity fund portfolio. Remember, shifting money may have a cost in terms of capital gains, exit loads and transaction charges; but it is still better than just watching your portfolio lose value. Make a clear choice between active and passive allocation by looking at the fund expense ratios.
A good stock is a good buy in every correction and the same applies to equity funds also. As Warren Buffett said, you should buy and bargain for equities like you would do at any attic sale or bargain sale in the market. The principle should be the same; look ruthlessly for deep pockets of value and lap them up. And when you get equity funds at a bargain sale, don’t miss the chance to make the best of it. For example, buying technology funds at the lows of 2001 and 2002 would have yielded massive multi-baggers for investors. This may be your time to buy quality equity funds at cheap prices. A good stock or a good fund is always a good buy if the price is a little more attractive. You cannot let this opportunity go.
That is the gold rule. When you are not sure of the timing of entry, use the systematic route. When the markets are falling sharply, never try to outguess or get one-up on the market. You may end up catching a falling knife. In such cases, a SIP saves you the worries of timing the market by just being systematic. At the end of the day, you would still be better off doing a SIP. The rupee cost averaging would still work in your favour. Remember, even if you have a lumpsum investment, you can convert that into a debt fund investment and then sweep funds regularly into equity funds. That would also work like a SIP.
What is the final takeaway on this equity fund selection story? You do not have to panic just because the NAV is going below the purchase price. There are different options available to you and you do not have to rush for the exits each time the NAV falls.