How stock market crash impacts Mutual Fund investors: Golden lessons from past

Indian stock markets recorded their worst one-day fall of 2023 on Wednesday (February 22), closing in the red for the fourth successive session. Data shows that Sensex crashed 927.54 points or 1.53% to 59,744.98 while the Nifty fell 272.40 points to 17,554.30.

Even on Thursday (February 23), both Nifty 50 and Sensex opened on a flat note but were able to recover over 26 and 73 points respectively as of 10.15 am.

Given the volatile nature of share markets, one cannot be sure of when the stocks will start rising again. This naturally raises a question in the minds of investors, especially those who invested right before the crash, as to what will happen to their money. While the future can’t be predicted, past market crash events have left some lessons for investors.

For mutual fund investors, experts always advise not to get too much concerned about market crashes or sudden rises in the benchmark indices.

Also Read: How to avoid sleepless nights due to volatile stock markets in 2023: Two tips

Sharp declines and sudden jumps are part of the routine market cycle. Though in an ideal world, every mutual fund investor would want the markets to keep rising as it does impact their net asset values (NAVs), crashes are something that they can’t avoid.

As mutual fund investors are invested for longer terms, data from past market crashes show that temporary declines in stock markets do not have a very big impact on their returns in the long term.

For instance, there was a 38% absolute fall in the markets during the 2020 Covid Crash (see chart below). Yet, investors who had invested in some funds tracking the Nifty 50 Total Return Index (Nifty 50 TRI) right before the fall compounded their wealth by 14% or even more. Several mutual funds in the last three years have given a return of over 20%, helping investors beat inflation.

Data from FundsIndia’s recent Wealth Conversation report shows that even if you invested right before a market crash, returns over long time frames have still turned out to be decent.

© Provided by The Financial Express
Source: Funds India

It has been witnessed in past that every market crash is followed by a recovery and further upside. In fact, on several occasions, market upsides have been much higher than declines. According to the FundsIndia report, temporary declines of 30-60 in stock markets have been seen once every 7-10 years.

© Provided by The Financial Express
market crash data

There has also been an intra-year decline of more than 10% almost every year. But three out of four years ended with positive returns.

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The above data shows that in the long term, the impact of market crashes is not as significant as it may seem at the time of the crash. The actual returns from mutual fund investment depend more on the choice of funds and an individual’s investment strategy. Therefore, financial advisors and investment experts always advise mutual fund investors to invest for the long term after doing proper research and taking guidance before investing.

(Disclaimer: Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing)