When Markets Fall, Should You Worry About Your Investments?

 

A message to our investors on market volatility, mutual fund investments and the importance of staying disciplined.

Dear Investor,

Over the past few weeks, equity markets have witnessed a significant correction. Naturally, if you have checked your mutual fund portfolio recently, you may have noticed a decline in its value.

For many investors, especially those who have started investing in equity mutual funds in the last few years, this can be an uncomfortable experience.

Questions may arise:

• Why is my portfolio value falling despite investing regularly?

• Have we selected the right mutual funds?

• Should we stop our SIPs or move our money to safer investments?

• What if the market falls further?

• Are we doing the right thing by continuing to invest in equities?

These are genuine concerns. As someone who works closely with you on your investments, I believe it is important to address them openly rather than simply asking you to ignore market movements.

Let us understand what is happening and, more importantly, what it means for your investments.

1. First, let us understand what is happening in the market

Stock markets do not move in a straight line.

There are periods when markets rise steadily, periods when they remain range-bound, and periods when they fall sharply.

Market corrections can happen for several reasons, including global economic uncertainty, geopolitical tensions, rising crude oil prices, interest rate movements, foreign investor selling and concerns about corporate earnings.

When uncertainty increases, investors often become cautious and sell shares. As selling spreads across sectors, the prices of many good businesses can also decline.

This is important to understand: a fall in share prices does not automatically mean that every business has become weaker or that every mutual fund has suddenly become a poor investment.

Sometimes, market prices fall faster than the underlying business outlook changes. At other times, the correction may reflect genuine concerns about future earnings. Understanding the difference requires careful evaluation.

Our approach is not to assume that every fall is an opportunity, nor to assume that every fall signals a crisis. It is to evaluate the situation and act according to the investment objectives and time horizon.

2. Why is your mutual fund portfolio showing a loss?

When you invest in an equity mutual fund, your money is invested in shares of companies through a professionally managed portfolio.

The value of those shares changes every day. Consequently, the Net Asset Value (NAV) of your mutual fund also changes.

When the overall market falls, even well-managed mutual funds can experience a decline.

For example, suppose you have invested ₹10 lakh in equity mutual funds. During a market correction, your portfolio value falls to ₹9 lakh.

Your portfolio is now showing a decline of ₹1 lakh, or 10%.

This is uncomfortable to see. However, the decline in portfolio value alone does not tell us whether the original investment approach was wrong.

We must also consider:

• Why the money was invested in equity.

• When you expect to need this money.

• Whether the portfolio is appropriately diversified.

• Whether the underlying funds continue to follow their intended investment approach.

• Whether your goals and financial circumstances have changed.

If this money is intended for a goal 10 years away, the present market decline needs to be evaluated differently from money required for a house purchase next year.

The same market correction can have very different implications for two investors, depending on their goals and time horizons.

3. Are we doing the right thing by investing through mutual funds?

This is an important question, and I want to address it clearly.

Our investment approach is not based on predicting which way the market will move tomorrow, next week or next month.

Instead, we focus on building an investment portfolio that is aligned with your goals, time horizon and ability to withstand market fluctuations.

Our approach includes:

Goal-oriented investing: Equity investments are generally meant for long-term goals. Money required in the near future should not be exposed to unnecessary equity market risk.

Diversification: We spread investments across suitable funds, investment styles and market segments, rather than depending entirely on one company, sector or investment theme.

Fund selection and monitoring: We evaluate funds on relevant parameters such as investment philosophy, consistency, portfolio quality, risk, performance across different market conditions and suitability within the overall portfolio.

Asset allocation: We recognise that equity is only one part of a well-considered investment portfolio. Debt-oriented investments and other suitable assets may have a role depending on your goals, liquidity requirements and risk tolerance.

Periodic review: We review portfolios and make changes when there is a sound reason to do so. A market correction, by itself, is not sufficient reason to abandon a suitable long-term investment approach.

This is the process we follow to make informed investment decisions.

However, it is equally important to acknowledge that no investment process can eliminate market risk, guarantee positive returns or ensure that every selected fund will outperform its benchmark.

Our responsibility is to follow a disciplined process, review the evidence and make appropriate changes when required.

4. If we have selected good mutual funds, why are they falling?

This is a common and understandable doubt.

Think of two well-run businesses operating in the same market. Both may have sound management, reasonable debt levels and good long-term prospects. Yet, during a period of widespread selling, the share prices of both businesses can fall.

Mutual funds face a similar situation because they invest in the market.

A fund manager may select companies carefully, but the manager cannot completely control market sentiment, interest rates, foreign investor flows or geopolitical developments.

Even a fund with a sound investment philosophy can underperform temporarily. And a fund that has performed well in the past is not guaranteed to perform well in the future.

Therefore, we should not judge a mutual fund solely by looking at its latest return or the current value of our portfolio.

We should examine whether its investment approach remains appropriate, how it compares with relevant benchmarks and peers over meaningful periods, and whether it continues to serve its intended role in your portfolio.

Our objective is not to find a fund that never falls. Such a promise would be unrealistic. Our objective is to build and maintain a suitable portfolio while understanding and managing the risks involved.

5. Should you stop your SIPs when markets are falling?

For investors investing towards long-term goals, a market correction is not automatically a reason to stop a Systematic Investment Plan (SIP).

Let us take a simple example.

Suppose you invest ₹10,000 every month in an equity mutual fund. When the NAV is ₹100, you receive 100 units. If the NAV subsequently falls to ₹80, the same ₹10,000 buys 125 units.

You receive more units because the NAV is lower.

However, there is an important point to remember: buying more units at a lower NAV does not guarantee a profit or ensure that the market will recover soon. The investment can decline further, and returns depend on future performance.

The benefit of continuing an SIP is that it maintains your investment discipline and spreads your purchases over time, rather than requiring you to decide the perfect time to enter the market.

If your goal is long term, your financial circumstances remain stable and your equity allocation is suitable, continuing your SIP may be appropriate.

But an SIP should not be continued blindly. If your income has changed, you need the money sooner than expected, or your portfolio carries more risk than you can comfortably bear, we should review the situation.

We should continue investing because it makes sense for your goals—not merely because the market has fallen.

6. Should we move everything to debt or wait until the market becomes stable?

It is natural to feel that moving to safer investments during a market fall will protect us from further losses.

The difficulty is that nobody knows in advance when the market has reached its lowest point or when a sustained recovery will begin.

If we move out of equity after a significant decline, we may lock in the loss. If we then wait for the market to become comfortable before investing again, prices may already have recovered substantially.

On the other hand, remaining invested in equity with money that is needed shortly can also expose us to unnecessary risk.

That is why we should not make an all-or-nothing decision based purely on fear or optimism.

Instead, we should evaluate:

• How much equity exposure is appropriate for your goals.

• Whether sufficient money is available for near-term needs.

• Whether your portfolio has become excessively concentrated or risky.

• Whether any changes are justified by the underlying investments or your personal circumstances.

Debt-oriented investments are not entirely free of risk either. Their behaviour depends on the instruments held, interest rates, credit quality and investment duration.

The right approach is to use suitable investments for suitable purposes, rather than expecting one asset class to protect us in every market environment.

7. What should we do now?

During a market correction, doing the right thing is often more important than doing something quickly.

Our approach is to focus on the following:

First, review the purpose of each investment. Money intended for long-term wealth creation should be evaluated differently from money needed in the next one or two years.

Second, review the portfolio rather than reacting to individual numbers. A temporary decline should be considered alongside asset allocation, fund selection, diversification and the investor's overall circumstances.

Third, make changes only when justified. If a fund's investment approach, quality or suitability has materially deteriorated, it deserves attention. If the portfolio remains appropriate and the decline is primarily due to a broad market correction, an immediate switch may not help.

Fourth, maintain adequate liquidity. We should not be forced to sell long-term investments during a downturn because money required for household expenses or an upcoming goal was unnecessarily exposed to equity.

Finally, keep the original goal in perspective. If the goal is several years away, the relevant question is whether the investment approach remains suitable for that goal—not whether the portfolio is positive every month.

This does not mean we should ignore market risks. It means we should respond to them thoughtfully, with facts and a clear purpose.

8. What if the market falls further?

This is perhaps the most difficult question because the honest answer is that it can.

Markets may decline further before they recover. They may also recover sooner than expected. Neither outcome can be predicted with certainty.

We should therefore avoid building our investment decisions around the assumption that a recovery must happen next month or that the worst is already behind us.

Instead, our portfolio should be constructed with an understanding that volatility is part of equity investing.

Our responsibility is to review the portfolio, assess whether the risks remain appropriate and make changes when the evidence warrants them.

Your responsibility is to keep us informed if your income, liquidity needs, goals or ability to tolerate fluctuations changes.

Together, we can make decisions based on your actual situation rather than on fear created by daily market movements.

9. Remember why we started investing

When we began investing, the objective was not to earn a positive return every month.

The objective was to build wealth over time, meet important financial goals, create financial independence and give ourselves and our families greater choices in life.

Those objectives do not automatically change because the market has corrected over a few weeks or months.

Of course, our investment approach must remain flexible. If circumstances change, we must be willing to reassess. Staying disciplined does not mean refusing to acknowledge mistakes or risks.

But neither should we abandon a suitable long-term approach merely because markets have become uncomfortable.

A falling portfolio is emotionally difficult because we can see its value changing every day. The progress towards a long-term goal, however, must be assessed over an appropriate period and in the context of the risks we are taking.

Markets will rise and fall. Our decisions should not rise and fall with every market movement.

A final word

I understand that seeing your investment value decline can create doubt, particularly when you have worked hard to accumulate your savings.

Please remember that you do not have to interpret every market development or make investment decisions on your own.

Our role is to help you understand your portfolio, review its suitability, monitor your investments and make informed decisions in line with your goals.

We will not promise that your portfolio will avoid every fall. We will not claim to know exactly when the market will recover. And we should never make changes simply to create the impression that we are doing something.

What we can commit to is a disciplined approach: reviewing the investments, evaluating the risks, communicating honestly and making changes when there is a sound reason to do so.

If you have concerns about your portfolio, please reach out to us. We can review your investments in the context of your goals, time horizon and financial requirements.

The purpose of investing is not to avoid every uncomfortable phase of the market. It is to make thoughtful decisions that help us remain on course towards the goals that matter to us.

Let us stay informed, stay disciplined and focus on the bigger picture.

Warm regards,

Nilesh Todarmal, CFP®
Arthvedh Financial Solutions