Every time markets turn red, our Belong WhatsApp community lights up with the same question: "Should I sell everything before it gets worse?"
The short answer: Probably not. But let's understand exactly what happens to your mutual fund during a crash so you can make informed decisions rather than emotional ones.
Market crashes directly affect mutual fund NAVs, which in turn impact investor returns in both the short and long term.
When a stock market crashes, the value of securities held by mutual funds decreases, causing a corresponding reduction in NAV.
But here's what most panicking investors miss: NAV reductions represent notional losses unless you redeem your units.
If you sell during a downturn, you convert these notional losses into actual ones.
How a Crash Affects Your Mutual Fund NAV
NAV, or net asset value, is the unit price of a mutual fund. The value of your mutual fund holdings depends upon the fund's NAV.
When NAV comes down following a crash, so does your investment's worth.
Here's a simple example. Suppose a fund's NAV before a crash is ₹50, and you hold 1,000 units. Your investment is worth ₹50,000.
If the NAV drops to ₹40 following the crash, your investment value decreases to ₹40,000 - a ₹10,000 reduction.
But that ₹10,000 loss exists only on paper. You haven't actually lost anything until you sell.
Before Crash | After Crash | Paper Loss |
|---|---|---|
NAV: ₹50 | NAV: ₹40 | ₹10 per unit |
Units: 1,000 | Units: 1,000 | Units unchanged |
Value: ₹50,000 | Value: ₹40,000 | ₹10,000 |
Your units remain the same. Only the price per unit changes temporarily.
👉 Tip: During crashes, check your unit count, not your portfolio value. Units don't disappear - only prices fluctuate.
Notional Loss vs Actual Loss: The Critical Difference
This distinction is fundamental to making sound decisions during market crashes.
Notional Loss: Your portfolio shows ₹40,000 instead of ₹50,000. The loss exists on your statement but hasn't been realized. Your 1,000 units are still intact.
Actual Loss: You panic and sell at ₹40 NAV. You receive ₹40,000. The ₹10,000 loss is now permanent and irreversible.
Market crashes cause temporary declines in mutual fund values.
Exiting during this period locks in losses, converting notional (unrealised) losses into actual ones. It's important to avoid impulsive decisions driven by fear.
Every major market recovery has rewarded investors who held through the crash. Those who sold at the bottom locked in losses permanently while watching others recover.
Compare recovery strategies in our guide on timing the market vs time in the market.
What Different Fund Types Experience During Crashes
Not all mutual funds react identically to market crashes. Some funds demonstrate greater resilience, while others experience more significant declines.
Equity Funds: Take the biggest hit. Large-cap funds typically fall 15-25% during severe crashes.
Mid and small-cap funds can fall 30-40% or more. During the recent correction, large cap funds and those with value oriented approaches have fared relatively better than mid cap and small cap funds.
Debt Funds: Usually stable during equity crashes.
May even rise as investors flee to safety. Interest rate movements matter more than stock market crashes for debt funds.
Hybrid Funds: Fall less than pure equity funds due to debt allocation.
A fund with 65% equity and 35% debt might fall 10-15% when markets crash 25%.
Liquid/Overnight Funds: Almost unaffected by equity market crashes. Your emergency fund in liquid funds stays protected.
Explore different fund categories through our mutual funds tool.
Historical Crashes and Recovery Periods
History shows markets always recover. The question is how long it takes.
Crash | Peak-to-Bottom Fall | Recovery Time |
|---|---|---|
2008 Global Crisis | ~60% | ~2 years |
2020 COVID Crash | ~38% | ~8 months |
2024-25 Correction | ~14% (Nifty) | Ongoing |
The Indian equity market reached its peak in late September 2024, with numerous stocks hitting lifetime highs before the subsequent correction.
Around 14% from the level of 26,277.35 for the Nifty 50 index represents the current decline. Yet markets have consistently recovered from every crash in history.
During the 2020 COVID crash, Nifty fell from 12,400 to 7,500 in weeks.
Investors who stayed invested saw their portfolios not just recover but multiply by late 2021. Those who exited in March 2020 missed one of the fastest recoveries ever.
Learn from historical patterns in our guide on can I lose all my money in mutual funds.
Why SIP Investors Actually Benefit from Crashes
If you're investing via systematic investment plans (SIPs), crashes are secretly working in your favour through rupee cost averaging.
Suppose you invest ₹10,000 monthly in a mutual fund via SIP. If the NAV drops from ₹50 to ₹40 in a market downturn, your fixed investment will buy more units (250 instead of 200).
Market Condition | NAV | Monthly SIP | Units Purchased |
|---|---|---|---|
Before crash | ₹50 | ₹10,000 | 200 units |
During crash | ₹40 | ₹10,000 | 250 units |
After recovery | ₹60 | ₹10,000 | 167 units |
When the market recovers and the NAV rises to ₹60, the total value of your units increases, maximising returns in the long term.
Those extra units purchased during the crash become your wealth accelerators during recovery.
👉 Tip: Never stop SIPs during crashes. This is precisely when rupee cost averaging works hardest for you.
Compare strategies in our guide on SIP vs lump sum investing.
What Happens to Redemptions During Crashes
Market crashes often trigger panic among investors, leading to increased redemption requests.
Fund managers may be forced to sell holdings at unfavourable prices to meet these redemptions, potentially exacerbating NAV declines.
This can create a negative feedback loop where selling pressure drives prices lower, triggering more redemptions.
By staying invested, you avoid contributing to this cycle and position yourself for recovery.
Your redemption during a crash:
- Locks in your losses permanently
- Adds selling pressure to an already falling market
- Removes your ability to participate in recovery
- May trigger tax implications on short-term gains from earlier investments
Understand redemption rules in our guide on mutual fund repatriation for NRIs.
How Fund Managers Respond to Crashes
During market downturns, fund managers typically reassess their portfolios and may rebalance holdings to limit losses or capitalise on potential opportunities.
Funds with flexible mandates might increase cash positions or shift toward more defensive sectors.
Over the past five months, funds like Parag Parikh Flexi Cap Fund demonstrated notable resilience with only 4.3% decline compared to the Flexi Cap category average decline of 14.9%.
This was largely attributed to strategic asset allocation, including substantial exposure to large-cap stocks and international equities.
Active fund managers earn their fees during crashes by making defensive moves, holding cash reserves, and identifying buying opportunities when others panic.
Learn about fund selection in our guide on how to choose mutual funds.
What You Should Actually Do During a Crash
1. Don't Check Your Portfolio Daily
Constant monitoring during crashes increases anxiety and the likelihood of panic selling. Check monthly or quarterly instead.
2. Continue Your SIPs
SIPs allow you to invest systematically, leveraging market corrections to buy more units at lower prices.
This approach reduces the impact of market volatility and enhances long-term returns.
3. Avoid Lump Sum Withdrawals
If you need money, consider partial redemptions rather than exiting completely. Better yet, use emergency funds from liquid investments rather than touching equity holdings.
4. Rebalance If Needed
If your equity allocation has fallen below target due to the crash, consider adding more equity. This is counterintuitive but mathematically sound.
5. Review Your Fund's Performance vs Peers
A fund falling 20% when its category falls 25% is actually outperforming. Context matters more than absolute numbers.
👉 Tip: Write down your investment goals and timeline. Read them when you feel like panic selling. Long-term goals don't change because of short-term crashes.
Funds That Hold Up Better During Crashes
Some fund categories historically show more resilience:
Large-Cap Funds: Blue-chip companies have stronger balance sheets to weather economic storms. Falls are typically 10-15% less than small-caps.
Value Funds: Focus on undervalued stocks that have less room to fall. DSP Value Fund fell only 5.9% during the recent correction compared to the Value Fund category average of 14.6%.
Hybrid/Balanced Funds: Built-in debt allocation provides cushion. Consider these if you can't stomach pure equity volatility.
International Diversification: Funds with overseas exposure may be insulated from India-specific crashes.
Explore defensive options through GIFT City mutual funds for USD-denominated alternatives.
NRI-Specific Concerns During Crashes
For UAE-based NRIs, crashes create additional considerations:
Currency Timing: A market crash combined with rupee depreciation compounds your losses in AED terms. However, recovery often brings rupee appreciation too.
Repatriation Decisions: Don't rush to repatriate during crashes. You'll lock in both equity losses and unfavorable exchange rates.
Tax Loss Harvesting: Selling losing positions can offset gains elsewhere. Short-term capital losses can offset both STCG and LTCG. Losses carry forward for 8 years.
GIFT City Alternative: For those concerned about INR volatility during crashes, GIFT City investments offer USD-denominated options.
Compare rates and explore alternatives using our NRI FD rates tool and Gift Nifty tracker.
When Selling During a Crash Makes Sense
Despite everything above, there are legitimate reasons to exit:
You Need the Money Immediately: Medical emergencies or unavoidable expenses take priority over investment principles.
Your Risk Tolerance Was Wrong: If the crash reveals you can't sleep at night, your allocation was too aggressive. Reduce equity after recovery, not during the crash.
Fund-Specific Problems: If your fund is underperforming peers significantly, the problem might be the fund, not the market.
Life Stage Changed: Approaching a major goal or retirement may warrant de-risking regardless of market conditions.
Learn about proper exit strategies in our guide on when to exit mutual funds.
Explore GIFT City Alternative Investment Funds for portfolio diversification.
Key Takeaways
Market crashes reduce your mutual fund NAV temporarily, but the loss becomes real only when you sell.
Historical data shows every major crash has been followed by recovery - the 2008 crisis, 2020 COVID crash, and countless corrections before them.
SIP investors benefit from crashes through rupee cost averaging, accumulating more units at lower prices.
The worst action during a crash is panic selling; the best action is usually continuing your SIP or doing nothing at all.
Every market downturn in history has eventually been followed by a recovery. Stay informed, keep your investments diverse, and don't lose sight of your long-term goals.
Thousands of NRIs discuss market conditions daily in our WhatsApp community. Join them for real-time insights and peer support during volatile periods.
Ready to stay invested through volatility? The Belong app helps you track your mutual fund portfolio, monitor performance, and make informed decisions without emotional reactions.
