The coronavirus pandemic has taken the world by surprise and dismay. Numerous people have lost their lives as well as their jobs because of this pandemic. That’s because the novel coronavirus has not just affected the physical health of the nations, but has also had an adverse effect on the global economy. Since the last three to four months, there has been a strict lockdown in the nation. Businesses, industries, offices, schools everything was shut. This caused an adverse effect on the mutual fund industry as well. For many months, the portfolio of several investors were constantly under threat.
Several incurred losses and out of fear of losing even further, many investors withdrew their mutual fund investments. Now what these people did, was it a good idea? Or should they have remained invested in mutual funds even though their portfolio had incurred losses? To understand this, we need to first find out what mutual funds are and how they work.
What are mutual funds?
Mutual funds are a pool of professionally managed funds that invest in Indian as well as foreign economies. Mutual funds carry a diversified portfolio. A single mutual fund unit is a combination of multiple company stocks. SEBI, the regulator of mutual funds in India describes them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”
What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the various money market instruments like equity, stock, bonds, call money, government securities, company fixed deposits, debentures, etc. Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV. The performance of a mutual fund depends on the performance of its underlying assets and the sectors and industries in which it invests.
Should investors continue investing in mutual funds even during the COVID-19 pandemic?
Some mutual funds like equity funds are designed for long term investments. Some funds like ELSS come with a predetermined lock period of three years. This means that investors cannot redeem their ELSS fund units before the lock-in period. In this scenario if you prematurely withdraw from your mutual fund investments, it is you who is going to be at loss. That’s because investors will have to pay a penalty for redeeming their ELSS units. Plus if you withdraw your other ELSS investments in a rush, imagine the additional tax that you will have to pay on all those withdrawals.
Also, equity mutual funds do not tend to get affected by the daily market upheavals. They are made for the long run and hence, one should not worry is their portfolio is temporarily affected. In fact, this is an opportunity for investors to invest more and buy more units since most of the NAVs have gone down. This is the best opportunity to benefit from rupee cost averaging. Historically, mutual fund investments like equity funds have given better results when one remained invested in them for five years or more.
In fact, investors should continue investing in mutual funds via SIP without worrying about the ongoing pandemic. They can even make the use of an online SIP calculator to get a rough estimate of their accumulated wealth from their current monthly investment. The main thing for investors to remember is to not panic. Continue systematic investments and you might be able to get closer to your ultimate financial goal.