The share market is crashing and we do not know when it will stop crashing. In the recent past the BSE SENSEX crashed from a peak of about 41000 to 27000, currently. This represents a fall of about 34 %. The SENSEX is at approximately 65 % of what it was in February, 2020. Continue reading after the two coloured boxes below
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So what happens to MF investments?
I took a sample from Economic Times Wealth page on their website. Under the category “Top Performing Funds – ELSS Schemes”, 96 MFs were listed. Of these 96, only 29 showed a positive 3-year return. The highest was 7.25 % , the remaining 28 showed a return of less than 7 %! The one-year return for all 96 was negative. How much better are these MFs compared to banks and life insurance? Banks and life insurance endowment gives a comparable return, without the risk of volatility. In fact over the long term life insurance endowment and banks are likely to give better returns than mutual funds, because of the lack of volatility in their returns. Read And the Tortoise Wins to know more.
Probability of earning high returns in MFs in the near future
The data above shows that as of today there is a 35 % chance that the investor will earn a positive rate of return on ELSS schemes. There is a less than 1 % chance that the investor in ELSS schemes will earn at least 7 %. And mind you these are not risk-adjusted rates. The risk adjusted rates will be much lower than that mentioned above. We can compare mutual funds to banks or life insurance endowment only after adjusting the nominal returns on mutual funds to the risk that they carry. Read How to Compare to know more about comparing high risk and low risk investment returns.
Comparing the market crashes of 2008 with 2020
The business newspaper, MINT, reported (23 March 2020): In fact, the markets (in 2020) have erased 40-months’ gains in just a month. By contrast, in 2008, it took over five months for the markets to drop about 36%. A further drop in the market prices of shares cannot be ruled out. I am not an expert at predicting share prices, but commonsense tells me that since the fall in prices is because of the corona virus, and since corona virus is likely to affect business till at least June 2020, the share market has only one direction to go – DOWN and DOWN.
What then happens to a MF investor?
The financial loss to the mutual fund investors is huge. Many of them (especially those who put their life’s savings in the hope of making quick money) stand the risk of losing all their money. This will be more so if the investor purchased the units in a fund at market rates after the launch of the scheme. Suppose the NAV is Rs. 23 today and the investor had purchased the units when the NAV was Rs. 30, the loss is total. But if the investor had purchased the units at Rs. 10 (at the time of scheme launch), he or she can still gain. But the markets are moving in a direction and at a pace that gives a good chance for the NAV to fall below issue prices, making it a loss for all investors. It will be sensible for the hard working middle class investor to withdraw and invest the money in safer investments, such as life insurance and banks, to protect whatever money that can be recovered by selling off.
When will the share markets pick-up?
Quoting a market expert MINT wrote: “The current risk aversion is unprecedented, and the panic will leave Lehman-led anxieties (of the 2008 crash) behind. While an obvious solution to the Lehman crises was the bailout itself, current circumstances warrant an economic pick-up as only monetary easing may not emerge as a likely solution” . In other words for the share markets to start giving positive returns, the economy will have to pick up. Which means, factory production has to pick up, the services sector has to do well, jobs and employment should be created in large numbers, business investments should be made, etc. The current state of the economy does not give hope that all this will happen in the near future. So we are in a long drawn process of market recovery that may take not less than 1 year. May be much more.
Even though there are losses that mutual fund investors are making because of current market conditions, it is important to note that there is a niche market for mutual funds and ULIPs. We have to understand that market and sell to its needs in an ethically correct manner.
Look out for articles in the immediate future on ULIPs and how to sell them. Follow ethically correct practices to earn your customer’s trust and confidence and to establish yourself as a successful agent. For a life insurance agent to be successful he or she should …
Sell Risks Not Returns
Because Returns Are Uncertain, While Risks are Certain
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