Mutual fund NAV fell below your purchase price? 4 power steps to take

At the peak of the technology boom in 2000, scores of mutual fund Asset Management Companies came out with New Fund Offerings (NFOs), most with IT as their theme. Over the next couple of years some of these funds lost between 35-40% of their Net Asset Value (NAV). While that may have been an extreme situation, even under normal circumstances, you come across situations wherein you find that the NAV has gone below your purchase price. What should be your approach at that point of time?

There are broadly four ways to deal with your NAV going into negative territory. However, this will vary from one investor to another, based on the profile, future requirements, etc.

1. When not to do anything
Sitting tight is often the most important decision to make in financial markets. When your NAV is down purely due to temporary corrections, or due to minor bouts of selling, you need to do nothing. It is important that you do not start creating strategies where none is required. There is always an element of market volatility that you must invariably provide for.

2. Be clear on what to buy and sell
This is a key decision to take when markets are correcting sharply. Identify the themes that are falling sharply, due to froth. For example, in 2000 it was technology and telecom, while in 2008 it was real estate and infrastructure. These sectors created the froth and they also worsened the correction. If your portfolio is loaded with these funds, it is time to do a switch. You have to sell into weakness and buy into MF themes and sectors where you see strength.

3. Find attractive picks in this bargain sale
If you were an avid buyer of equity funds at 24 times P/E, there is no reason you should not be adding MF at 18 times P/E. As Warren Buffett said: Buy and bargain for equities like you would do at an attic sale. And when you get equities at a bargain sale, don’t miss the chance to make the best of it. This may be your time to buy quality equity funds at cheap prices. This is the time to selectively get your shopping baskets out.

4. Don’t worry about market timing
MF companies created Systematic Investment Plans (SIPs) so that you do not have to worry about trying to find market tops and bottoms. When markets are cracking, never try to outguess or predict the market. Above all, do not try to catch a falling knife. You do not know at what level the market will bottom out and you never will. In fact, if have a SIP on a MF, you can use your judgement and increase the size of your SIP when markets are sharply down. It is not essential, because a purely passive approach works well enough.

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Market corrections are part of the game in equity funds. Do not panic about NAV going into negative territory. As far as you do not see larger issues to worry about, just keep plugging away at your regular SIP.

By: Ketan Shah
(The writer is chief revenue officer, Angel Broking)

Source: DNA Money