Mutual funds, which have Indian equities, saw a severe downfall yesterday (22nd October), Mainly because major Indian stocks had fallen drastically. On a single day, Nifty cracked nearly 300 points, and BSE Sensex went down by 931 points.
Among all the Nifty 50 stocks, only three stocks, ICICI Bank, Nestle, and Infosys, ended up in green. This was the most significant red candle after the parliament election on June 4th. This indirectly impacted all the mutual funds in India. Here are the reasons for the stock market crash on October 22nd.
Why Are Indian Indices Down Today?
The Indian stock market saw major selloffs, with Sensex and Nifty 50 falling by over 1%. Mid and small-cap stocks dropped as much as 4%, leading to a market loss of ₹9 lakh crore in a single day. Here is the breakdown of reasons
Tensions In the Middle East
Tension in Middle Eastern countries like Israel, Hezbollah, and Hamas creates uncertainty for global investors. U.S. Secretary of State Antony Blinken traveled to the Middle East to push for a ceasefire in the ongoing Gaza war and Lebanon conflict. Israel intensified its strikes on Beirut, targeting Hezbollah militants, but some attacks affected civilians, with casualties reported. The conflict has displaced millions and caused widespread destruction.
These geopolitical risks keep investors worried, ultimately affecting the prices of oil supplies and leading to higher energy prices, affecting inflation and global markets. Global investors are moving their investments to low-risk options like gold and government bonds, affecting the Indian Indices.
Uncertainty around US presidential election
Upcoming US presidential elections also add to yesterday’s market nervousness. Currently, Democratic Vice President Kamala Harris holds a marginal 3-percentage-point lead over Republican Donald Trump, and the two remain locked in a tight race to win the November 5 US presidential election.
The outcome of the US presidential election will affect the markets in the shorter term, but the market will settle down soon and adjust to the outcome. Trump’s America-first protectionist trade policies risk slowing economic growth and increasing geopolitical tensions. He recently criticized India for its high tariffs.
Stretched valuations
Because of the stretched valuation of the Indian stock market, the valuations are higher than historical averages, even though large-cap valuations can be justified by their long-term growth prospects.
Comparing the price-to-earnings(PE) ratio, which is slightly above average, that is, two years 23 where the current actual PE is 22, indirectly saying that markets are inflated and need a correction. Market valuations are currently high, and specific triggers could prompt corrections, aligning them with long-term averages.
Sustained foreign capital outflow
After Beijing announced a stimulus to boost its economic growth, global investors began participating in the ‘Sell India and Buy China’ strategy. Foreign investors are rushing to Chinese markets because they find stocks there much cheaper compared to the Indian market.
Foreign Institutional Investors (FIIs) have been continuously selling equities in India, with total sales reaching a staggering ₹74,730 crore in October alone. This marks the highest monthly net selling by FIIs on record, surpassing the previous peak of ₹68,308 crore in March 2020, coinciding with the onset of the COVID pandemic. Here is the table showing the
Date | Amount (₹ Crore) |
Oct 01 | -5,579.00 |
Oct 03 | -15,243.00 |
Oct 04 | -9,897.00 |
Oct 07 | -8,293.00 |
Oct 08 | -5,730.00 |
Oct 09 | -4,562.00 |
Oct 10 | -4,927.00 |
Oct 11 | -4,162.00 |
Oct 14 | -3,732.00 |
Oct 15 | -1,748.00 |
Oct 16 | -3,435.00 |
Oct 17 | -7,422.00 |
Oct 18 | -5,485.70 |
Oct 21 | -2,261.83 |
Oct 22 | -3,978.61 |
Total | -86,456.14 |
Unimpressive Q2 earnings
Previous markets were only influenced by quarterly earnings in the last week, mainly companies that came up with reports like all nifty index heavyweights like HDFC Bank, ICICI, and Kotak Mahindra. Mostly, all the results were mixed or needed to meet expectations.
Corporate earnings recovery in Q2 has fallen short of expectations compared to Q1. Research analysts forecast a 4% quarter-on-quarter growth in profit for Nifty 50, but the risk of earnings downgrades is becoming more apparent. This has led to increased caution in the short term. High global inflation is impacting operating margins, and India may underperform in international markets, partly due to a shift in investment funds.
How To Manage Mutual Fund Losses?
Markets have significantly dropped, affecting the NAVs of both equity and hybrid mutual funds, particularly impacting equity mutual funds. The declining market and negative sentiment may lead to increased redemptions, forcing fund managers to sell assets at lower prices, which further reduces returns.
Here are the things to do when losing money in mutual funds:
Stay Calm and Avoid Panic Selling
During these crucial times, human beings tend to be irrational and make severe decisions because of market volatility, as everyone panics when selling. In these times, emotions take over our investments. So, when you see your investment portfolio losing value, stay calm, pause, and think carefully before making any decisions.
These short-time fluctuations constantly remind you about your long-term goals. Also, Limit your exposure to negative news or constant stock updates. Continuous monitoring can fuel anxiety and lead to poor decisions. Focusing more on the fundamentals of the company rather than market swings helps in avoiding irrational choices.
Reassess Your Risk Tolerance
Here are the simple steps for revisiting risk tolerance
- Set Clear Goals – Identify what needs to be achieved, like buying a home or saving for retirement.
- Review Finances – Look at current savings, income, and emergency funds to understand financial capacity.
- Check Investment Timeline – Assess how long the money can stay invested before it’s needed.
- Reflect on Past Decisions – Think about how past market ups and downs were handled, whether staying calm or panicking.
- Rebalance Investments – Make practical adjustments to investments based on how much risk can be comfortably handled now.
Keep SIPs On and Grow Long-Term Wealth
This gives a great advantage of Rupee cost averaging, which means more units at lower prices, which also reduces the average cost of investments. As the market recovers, those low-cost units gain more value, boosting overall returns. Continuous investment during dips amplifies compounding over time, leading to higher long-term growth. A key to long-term success is to continue SIPs during dips to prevent emotional reactions and encourage consistent investing.
Rebalance Your Portfolio
Rebalancing a mutual fund portfolio means adjusting the mix of investments to maintain the original risk level. For example, an investor might have started with 60% in equity funds and 40% in debt funds. Over time, due to market fluctuations, the equity portion could grow to 70%, making the portfolio riskier than intended. To rebalance, the investor would sell some equity funds and buy more debt funds to bring the portfolio back to the original 60:40 ratio.
This process helps maintain the desired risk level and locks in gains from equity when the market is high. Regularly reviewing the portfolio, especially after significant market movements, and making adjustments ensures the investments stay aligned with long-term goals. Some platforms also offer automatic rebalancing tools to make this easier.
Diversify to Spread Risk
As the saying goes, “Don’t put all your eggs in one basket,” this wisdom applies equally to mutual funds. Diversifying a mutual fund portfolio is crucial because different funds react differently to market corrections. Each mutual fund holds a unique mix of equity, debt, or other instruments, making it essential to spread investments across various funds. By keeping options open and not relying on a single type of fund, diversification becomes a key tool to manage risk and ensure a more balanced approach to investing. This strategy helps reduce the impact of market fluctuations on the overall portfolio.
For Instance, Rohan, a 35-year-old investor, allocates ₹ 10 lakhs by investing 60% in equity and 40% in debt to balance risk. He spreads his equity investments across large-cap, mid-cap, small-cap, and multi-cap funds to capture growth while managing volatility. After markets fall, Rohan can diversify further by increasing his debt allocation or adding investments in defensive sectors like healthcare or FMCG to his portfolio for stability. He could also consider hybrid funds to maintain a balanced approach between risk and safety.
FAQ’s
Why are mutual funds going down?
The main reason mutual funds are down is due to a significant drop in major Indian indices, especially Nifty, which fell nearly 300 points in one of the largest intraday swings since the COVID-19 crash. This decline has primarily affected equity mutual funds.
Should we sell mutual funds now?
Mutual funds are generally safe but not risk-free investments. The common risks they face include market ups and downs, over-concentration in certain stocks or sectors, inflation, liquidity issues, interest rate changes, and the risk of borrowers not paying back loans