Facing Losses? Here is the Smart Thing to do.

Updated: Feb 26, 2021

My Investment Value is in Red. What should I do? Should I sell my Investments to save my money from further losses?

The past few months have been difficult for us due to the pandemic that has affected the world’s economy and India’s economy as well. We too have suffered as the economy took a hit and have turned years of gain into losses which seems depressing. India’s Economy had been in tightropes due to the various National and International factors even before the Corona Virus hit India and the virus spread lead another blow which led to a crash. NSE broke its circuit due to a downwards of 10% in early trade on 13th March 2020 which led to the Indian Market being halted for the first time in 12 Years. (Source – LiveMint).

Since then, all days included, as of (05.05.2020) markets have been in stress and have given negative returns to equity investors as well as Equity Mutual Funds. Debt Market took a severe hit when one of the top Mutual Funds AMC, Franklin Templeton announced winding up of its 6 Credit Risk Schemes due to liquidity crunch due to increased redemptions. This news was overnight which took Investors by surprise and created a fear of uncertainty. This led to Investors placing redemption requests across AMC’s and Debt Mutual Fund Schemes over the fear of losing their amount. And this has been the story since. As of May 05, 2020, as reported by Financial Express, Credit Risk Funds saw a decline by Rs. 19000 Crore in April. So it is normal that an Investor experiences fear for their Investment being in Negative value and eroding their years of gain. Money is an emotional being that leads us to a series of reactions in our minds and also leads us to various hasty decisions which result only in disappointment later on. And one such hasty decision is selling Investments in Mutual Fund as soon as it goes Red from Green, in our attempt to protect the capital. Can’t blame you.

But let me ask you, what if there was a sale in a superstore near your home?

Where every item is available at purchase at a discount which you never got.

Would you buy the items or would you pass the opportunity?

Would you start hoarding the items that are available at a never before price or would you save the opportunity for the next time?

This was an example of buying when the prices are low while we are discussing from the selling point of view. So let me give you another example, suppose you have purchased a property for investment purposes, and assuming that you don’t rely on the property for Income or you don’t need money immediately, would you sell the property at a price lower than the price you paid for the property? Or would you wait for a suitable sale offer and then sell your property?

Another classic example that is used in the context of the topic being discussed here is that the example of Gold. Suppose you had purchased Gold for Investment purposes and later on you decide to sell it. Would you sell it when the prices are lower than what you paid for the gold or would you wait for a better price? Alternatively, you would also buy more gold when the prices are low. Would you or would you not?

Then now I must ask what should you do with your Mutual Fund Investments? Would you sell it or would you wait for the prices to go up? Let us evaluate two options,

Option 1: You decide to sell your Investments in Red. The Investment value in red and the loss shown to you is not the actual loss. It is the unrealized loss, it is the value of your loss if you sell it. It is not your “Actual Loss” until you sell it. So if you sell it then and only then it becomes your actual loss and the fear which you were having of suffering losses becomes true. By selling or redemption of your Investments, you book the loss or you put a done deal stamp on it and lose the value. You have no further chance of recovering from the loss and you decide not to risk your money again.

Option 2: You decide to hold your Investments in Red. The Investment value in red and the loss shown to you holds the potential of turning green when the overall market or the concerned price of the Investments in the scheme goes up. Your Investments have the possibility to earn you money if you stick with them. The units you hold will still be the same whether it is in Red or Green. And whenever the prices go up, and then when you sell it, you earn the money from your Investments.

If your purpose of the Investment is your overall financial growth and not speculative business to earn money from volatility, then the question of selling the Investments whenever they are in red doesn’t even need to be discussed. And if the purpose for which you needed the money is approaching in near future, the best option is to delay the purpose if possible and if not wait till it arrives, to even have a chance of receiving better value than now. Situations like this are rare and unplanned and instead of getting scared and making hasty decisions, a much better option is to have patience and trust in your Investments. Also, remember to only invest in products that match your Risk Capacity and Risk Profile. This will help you stay focused on your goals and not get easily driven off the road to Financial Growth. Contact your Financial Advisor today and get your Risk Profile assessed. Till then, this is Shreyans Shah signing off, Stay Home and Stay Safe.