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Does the share market affect mutual funds?

Highlights

  • Stock Markets crashed by 38% in the last 15-20 days – how much a bearing it will have on your mutual fund investments?
  • Read this post which tells you the exact impact of the crash on your investments

Share market does affect mutual funds positively and negatively, let’s understand the impact on different kind of mutual fund categories.

Equity Mutual Funds

  • There is a direct impact on equity mutual funds since these funds invest in stocks listed in the share/stock market.
  • There are roughly 6000 stocks listed on the stock exchanges. And mutual fund managers research all these companies and then invest in the ones they feel are of good quality and will generate good returns.
  • Every equity mutual fund scheme has a benchmark and its performance is viewed against the benchmark.
  • Most of the large cap mutual fund schemes have Nifty 50 as the benchmark, so if the Nifty 50 rises 3% in a day, the large cap equity funds should also rise 3% or more. If the fund rises less than 3%, it means the fund has under performed.
  • Similarly, if the Nifty 50 falls by 3%, equity mutual fund NAV will also fall around 3%. If it falls less than 3%, it means the fund has done better than Nifty and vice versa.

Balanced Mutual Funds

  • Balanced mutual funds comprise of both equity and debt.
  • Equity-oriented balanced funds invest around 60%-65% in equities and the rest in debt instruments.
  • Similarly, there are balanced funds that invest 60%-65% in debt and the remaining in equities.
  • The share market will impact the performance of the fund to the extent of the investments made in equities. So, if there is a fund with 60% in equity and 40% in debt and the share market goes down by 4%, only the 60% portion invested in equity will be impacted and the amount invested in debt won’t.
  • Similarly, for a fund with 60% exposure to debt and 40% to equity, the impact will be only on the 40% portion of the investment.
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Debt Mutual Funds

  • Debt mutual funds don’t invest in share markets, so there is no impact of share markets on debt funds.
  • They are impacted by the movement in interest rates, inflation, government security and bond yields.

Basis the type of mutual fund schemes one owns in his portfolio, there is an impact of share markets on the investments. In the current market scenario, people holding more equity mutual fund schemes are adversely impacted since markets have been falling for the last 15-20 days. Markets have fallen about 38% and some individual stocks have fallen even more. Equity mutual fund schemes have also fallen in line with the fall in markets.