22/09/2023
Bear Market is a phase of cycle of stock market and is good sign of healty investment. Investor should not fear sell in falling market rather he should by more unit of mutual fund to average his return and accumulate more unit at corrected price.
Let us assume you invested Rs 100,000 in an equity mutual fund scheme. The scheme NAV was Rs 100 and you bought 1000 units. The NAV rose to Rs 110 and then fell to Rs 90. Even though the market value of your fund is now less than your purchase price, this is only a notional loss – not an actual loss. Over time, market value of your investment may go up when the stock market recovers. Whether you make a profit or loss ultimately will depend on your actions. You may do one of the following:-
• Fear that market value of your fund will fall even further and redeem. By redeeming you will convert the notional loss of 1000 X (100 – 90) = Rs 10,000 into an actual loss of Rs 10,000.
• Think the market value of your fund will fall even further and you will have the opportunity to buy it again at a lower cost. Let us assume that you were right and the fund NAV falls to Rs 80. Even if Rs 80 is the lowest price you are unlikely to invest at that price because you will fear that price will fall even further. However, turnaround from market bottoms is usually very rapid. Let us assume you invested when the NAV is 95. You have Rs 90,000 from your redemption proceeds. So you will buy 947.4 units. In 1 – 2 years, the fund NAV becomes Rs 110. The market value of your investment will be Rs 104,210. So your profit is Rs 4,210.
• You do nothing – simply, stick to your investment plan despite the fall in prices. The market value of your investment may rise, fall and rise again. When your fund NAV is Rs 110, your profit will be = 1000 X (110 – 100) = Rs 10,000. Doing nothing and remaining disciplined was the best course of action in this example.
• Let assume you invest more when unit rate goes 80. Assume you buy again 500 unit at rate 80 and again 500 unit at rate 85. Then your total investment would be (1000X100 + 500X80 + 500X85) 1,82,500. Now the price is Rs.110 per unit so the total profit would be 2000 X 110-1,82,500= 37500
[ ] CONCLUSION:
A. You are in good profit when you do nothing when market in bear (falling) phase. (Profit 10,000 in example)
B. Your growth is considerably low when you try to sell when market fall and buy when market rise. (Profit 4,210 in example)
C. Your will be in very good profit and you buy more unit in falling market rather than seling your holding. (Profit will be 37,500 in example. It is 20.55%)
So, every fall in stock market should be taken as opportunity to invest and get compunded profit rather than QUIT.