What Happens Inside Your Mutual Fund During a Market Crash?
When the stock market crashes, most investors only see the impact on their mobile apps. The Total Value drops, the Returns percentage turns negative, and the Red color creates a sense of alarm.
But have you ever wondered what is happening inside the offices of Motilal Oswal or any major fund house during those hours? A market crash is not a system failure; it is a high-speed game of chess. While you are observing from the outside, the fund manager is inside, navigating a storm of data, redemptions, and opportunities.
The NAV Calculation: Measuring the Damage
The first thing that happens is a mathematical reassessment. A Mutual Fund is just a basket of stocks.
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The Math: If the stocks inside the basket fall by 5%, the NAV (Net Asset Value) must fall accordingly.
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The Timing: This calculation happens after the market closes at 3:30 PM. The fund house collects the closing prices of every single stock they own, subtracts the fund’s expenses, and announces the New NAV by late evening.
Managing the Redemption Pressure
The biggest challenge during a crash is Panic Selling. When thousands of investors decide to withdraw their money at the same time, the fund house must provide the cash.
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The Cash Buffer: Most funds keep 3% to 5% of their money in cash or liquid assets just for this reason. They use this emergency fund first so they don't have to sell their good stocks at a loss.
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The Fire Sale Risk: If the cash runs out, the manager might be forced to sell stocks. A good manager (like those at Motilal Oswal) will try to sell the weakest stocks first to keep the High-Quality ones for the recovery.
The Fund Manager’s Strategy: Buying the Dip
While beginners are panicking, professional fund managers are often shopping.
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QGLP in Action: Using the Quality, Growth, Longevity, and Price framework, the manager looks for Great Businesses that have become Cheap only because of the crash.
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Portfolio Cleaning: A crash is a great time for a manager to get rid of stocks that weren't performing well and replace them with Champions that were previously too expensive to buy.
The Inverse Movement of Hybrid Funds
If you are in a Multi-Asset or Balanced Advantage fund, the internal behavior is even more interesting.
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Automatic Safety: As the stock prices fall, the fund's internal software sees that the Equity percentage has dropped.
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The Hedge: Simultaneously, Gold or Debt prices often rise during a crash. The manager uses the profit from Gold to buy more Stocks at the bottom. This internal rebalancing is why these funds feel much colder (less volatile) than pure equity funds during a heatwave.
Summary: The Anatomy of a Crash
Conclusion: Trust the Process
A market crash is like a stress test for your mutual fund. It’s when the Research and Discipline of the fund house truly shine. While it’s hard to watch your portfolio value drop, remember that the fund manager is using that same volatility to plant the seeds for the next bull market.
As an investor, your only job during a crash is to do nothing. Let the professionals manage the cash, handle the redemptions, and buy the quality stocks. By Sitting Tight, you allow the internal machinery of the fund to work for you.