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

FAQs

What happens to mutual funds if the market crashes? ›

It depends entirely on what the mutual fund is invested in and where their money is coming from (i.e., investors who invested in them, who might now get cold feet and divest from the fund, thus causing the fund to lose the ability to take advantage of the market downturn by putting that money into good use and “buying ...

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.

When investing in equity mutual funds, do it via systematic investment plans (SIPs). By investing a fixed amount at regular intervals, irrespective of prevalent market conditions, you reduce the risk factor further. When markets are down, you get more units, and when markets are up, you buy fewer units.

Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.

When it comes to equity, it is very important that, especially when you are thinking about long-term goals, you want to exit as soon as you have 2-3 years left approaching your goal and there are just 2-3 years to get there.

There is no fixed timeframe for holding a mutual fund before deciding to sell. However, it's generally recommended to evaluate a fund's performance over three to five years before making a decision. This allows a more comprehensive assessment of the fund's performance across different market conditions.

Stay The Course With Long-Term Funds

With your mutual funds devoted to long-term growth, experts advise: stay the course.

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

Best funds to invest in during a recession

Small-cap funds can be a good option for aggressive investors with long-term time horizons. A risk-averse person can consider investing in a multi-asset mutual fund as it invests in various asset classes such as stocks, gold, debt, etc.

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.

When not to buy a mutual fund? ›

Usually, this is when the management fee is high. High annual expense ratio, high load charges or high fees paid when an investor buys or sells shares are not good signs. Mutual funds are also not a good option for people who want to exercise total control over their holdings.

Even if you're thinking about switching to a different equity fund, wait for some time as 1-year is not a duration that you should consider analysing a fund's performance. As long as you were thorough in your research when you invested your money, there is no need to exit mutual funds or switch to a different fund.

The recent market crash has caused a decline in mutual fund NAVs. Financial advisors have recommended that long-term investors may benefit from topping up their SIPs now to buy more units at reduced prices. This approach could improve returns when the market rebounds.

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.

The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well. U.S. Treasuries benefit from the flight to quality phenomenon that is apparent during a market crash.

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.

While the diversification of a mutual fund or ETF can help mitigate credit risk, their value can fluctuate based on market conditions, so they can be riskier than savings accounts or a government-backed bond, particularly if you have a short-term investment horizon and the mutual fund you're considering invests in ...

Note. By selling off mutual funds, you lose their potential for significant growth over time, especially if you have been reinvesting dividends to automatically buy more shares. In addition, you're only allowed to contribute so much to an IRA each year, so you won't be able to make up for your withdrawals later.

Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.