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People invest in various financial instruments, be it Equity stocks or mutual funds, for generally one purpose, to build an optimal corpus for their goals. Suppose you started investing, and one morning you woke up with the news that your investment value drops to zero? How scary will be your day?

Well, only the feeling of this though the investment value drops to zero, is similar to a nightmare, what will you do when this comes true? However, before that, it is must for an investor to know whether such a situation, when their investment value drop to zero arise or not? And if their investment becomes zero or negative, how they should deal with the situation?   

The chance of investment value dropping to zero is infinitesimally small, however, the fact can't is ignored that the market is volatile and completely unpredictable.  Let us know about these in detail!

Can An Individual’s Investment Reduce To Zero Or Negative? 

The chance of investment value dropping to zero is small, but not nil, so theoretically investment value can reduce to zero. If you are investing in stocks, and one company goes bust, then the value of your investment in those stocks becomes zero. This is one of the prominent risks of investing in equities. There are chances that your investment value can drop to zero when you are investing in stocks.

While in the case of mutual funds investment, chances of investment value dropping to zero are very minimal, at least to date no cases of mutual fund investment dropping to zero have been witnessed. However, while the return on your investment (ROI) can be negative, there is no way your investment itself becomes negative.

For instance, if we suppose that the value of a mutual fund portfolio dropped to zero, then, in that case, the value of all the securities and assets it has invested in drops to zero. Understand it through an example. Suppose you are investing in small-cap equity funds whose 80% assets are invested in small-cap companies and 20% assets are invested in AA-rated bonds. If the value of this small-cap fund drops to zero, that means the stocks of all the small-cap companies it had invested in will bust, for that all the small-cap companies it has invested in will have to shut and the values of bond investments need to become zero.

Well, the situation discussed above is near to impossible, thus the chances of a mutual fund portfolio value dropping to zero are negligible.

Now the question is if the value of a mutual fund portfolio drop to zero is negligible, can it turn negative, and if it turns out to be negative then how to manage the situation? Yes, the investment value of a mutual fund portfolio can turn out to be negative. 

What To Do If My Mutual Fund Investment Value Reduces To 25% Of Its Value? 

Well, this is possible, mutual fund investment value can turn out to be negative, given a market crash and an investment portfolio that lacks diversification. So, let’s assume this scenario and look at the best ways to tackle it:

Do Not Sell Your Investment In Panic When They Turn Negative…

Suppose you have invested around Rs 4 lakh in mutual fund investment, and suddenly due to market crash r correction, the value of your investment drops to Rs 1.5 lakh, today! Such a huge loss will only tempt you to sell your investment and save those which are left. However, experts suggest do not end up selling your investment in panic. Why? Understand!

Currently, your investment is negative and you are at a loss, but that loss is only on paper and temporary, it is not permanent, these reductions or losses can again become positive once the market recovers. But if sell out this investment in panic, you will end up making your temporary loss permanent.

Remember, historically, markets have always recovered from crises and disasters, and selling when they are down can be counterproductive.

Always Remember And Stay Stuck To Your Goals…

Regardless of what the current situation feels like, remember why you invested in the fund, to begin with. Typically, equity mutual funds are preferred by long-term investors with financial goals more than 5-10 years away. If you have invested in equity mutual funds, then I would suggest stick with your plan and goals for which you have invested and wait for the market to recover.

Diversify Your Portfolio, It Will Help Reduce Risk…

If your portfolio is adversely affected due to the lack of diversification, then you must start looking at investment avenues that can help you diversify while benefiting from the low prices right now. Diversifying your portfolio will work towards reducing your overall portfolio and give better chances to your portfolio to recover your losses, once the market starts going up again. 

Let Us Sum Up!

The market is volatile and the chances of stocks investment getting zero and mutual funds investment getting negative is reasonable. Staying calm and invested in mutual funds investment when they turn negative is the strategy to be followed because investors who stayed invested and slowly invested more would have the best opportunity to make good profits.

Keep reading our articles for more updates on finance and investment!!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).