With the Bombay Stock Exchange sensitive index — BSE Sensex losing around 9000 points in a month and about 6000 points in just a week, and equity investors witnessing notional loss in lakhs of crores in their wealth, mutual fund (MF) investors investing in equity MF schemes would also be a worried lot after seeing the capital invested in negative in the short run due to massive dip in Net Asset Values (NAVs).
For novice retail investors, witnessing erosion in the capital invested is hard to tolerate and instead of withstanding the market turmoil and waiting to see the notional loss turning into gain on market recovery, many investors having low risk tolerance either redeem their investments or stop their investments through systematic investment plan (SIP).
But is it a right decision to stop investing or redeem existing investments in low market to stop further loss?
To understand the implications of discontinuing SIP or redeeming your investments when the markets are down, you should compare the equity investment with investments in physical assets like gold.
If you sell gold at Rs 30,000 per 10 gram that you bought when the price was Rs 35,000 per 10 gram, you will lose Rs 5,000. But if you wait till gold prices increase to Rs 40,000, you would gain Rs 5,000 by selling it at high prices. Moreover, instead of selling gold at Rs 30,000 per 10 gram, if you buy another 10 gram and then sell the 20 gram gold at Rs 40,000 per 10 gram, you would gain Rs 15,000.
So, when the price of equity falls, you should invest more instead of redeeming your investments, because redemption in low market would turn the notional loss in real loss.
Similarly, you shouldn’t stop your SIP in low market. It is because, under SIP, same amount is invested in equal interval and when NAV of funds are lower at low market, you would get more units. As fund is denoted by the product of NAV and number of units (i.e. NAV x No. of units), higher the number of units you accumulate, the higher will be the fund value when NAV moves up in high market.
So, to get a higher return from your investments in equity MF, you should never stop your SIP at low market and if possible, make some additional investment to acquire more units to maximise the return.
