Can mutual fund investment drop to zero?

Can mutual fund investment drop to zero?

The thought of waking up and seeing your investment reduced to zero is worrisome for investors. What would an investor do if their money became negative? As investors, they understand these concerns.

The chance that either of these things happening is infinitesimally small, but the thought itself is very stressful. And considering the term unprecedented being associated with markets off late, anything could happen.

Let’s break the question down into smaller parts to answer comprehensively.

"Can my investment go to zero or become negative?"

A stock investment is essentially a risk where the investor risks losing money beyond what has already been invested because some companies can go under, resulting in no more return on the original capital.

On the other hand, if you have invested in mutual funds, then I don’t see this happening unless the world literally falls apart! However, while your investment itself might not yield a positive return (ROI), it is impossible for you to owe money someone – that is NOT POSSIBLE.

At least in the history of mutual funds, there has never been a time when the value of its portfolio dropped to zero. In other words, if all securities and assets in the fund portfolio return to 0$, then I guess it’s true that it would be worth nothing.

For example

Let me take an example of a high-risk small cap equity fund that invests 80% in small cap stocks and 20% in AA rated bonds. In order for the value of this fund to become zero, all small cap companies need to shut down and the values of bond investments need to die out (which is theoretically impossible unless the economy crashes).

I am glad you have that positive feeling. I hope this situation taught you a lesson to avoid the same mistake in future.

Let me answer the question that comes up more often than our first:

What happens when your investment reduces to 25% of its value?

Given a market crash and an investment portfolio that lacks diversification, some investors may find themselves in this position today. Let's assume the scenario to better understand how to tackle it:

1.Do not make hasty decisions.

Before you sell your mutual funds, I want to acknowledge that it is easy to panic. However, before you go on a selling spree, I want you to stop and think about a couple of things:

Notional vs. book loss. – Right now, you do not have any capital gains or losses; so if the markets recover, I will benefit. However, if I sell right now, then I will face a loss on paper and whatever happens in the market afterwards–good or bad–I won’t be able to make up for that loss.

Loss of opportunity – If you had held on to your investments for the longer-term, instead of selling now, then you would have lost out on the opportunity of earning future profits.

It is important to remember that history tells us the markets always bounce back from crises and disasters.

2. Analyze your investments

Before you make any moves, assess the current state of your investments. For example, if you invested in a mid-cap equity fund, examine its portfolio to gauge how it's handling this market climate.

An investment manager can help you determine whether or not to hold on to investments and sell those which present an opportunity.

3. Remember your investment goals

Whether you keep your investments in equity mutual funds or not is up to you, but if the fundamentals of these investments - long-term financial goals - are strong for you then stick with them.

4. Markets are always volatile.

The pandemic has not only affected the markets but also dampened our spirits. Most of us battle with feeling gloom and doom. These times of uncertainty encourage an assumption of the worst and create panic.

However, you must know that markets are-have been and always will be volatile. While this might not be something that you have heard of before, once the world learns more about the pandemic situation, the markets will bounce back.

5. Diversify your portfolio to reduce risks and maximize returns.

The lack of diversification in your portfolio will affect its performance negatively. Now is a good time for investors to seek out investments that help them diversify while benefiting from low prices.

Look for investments that have no impact on the value of your portfolio. This means that new investments should not decrease in value as your portfolio's value increases, nor will it make the opposite true.

Thus, you can reduce your portfolio's overall risk and stand a chance to recover if the markets show optimism.

In summary

Though this may be a potentially worrisome time, humans have survived times much worse than these and grown stronger. When the current crisis is over, those who stayed invested and strategically invested more will have the best opportunity to earn satisfactory profits. Sit down with your investments now and think carefully before making any decisions.

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