Sensex and NAVs

Today was truly a spectacular day at the markets. For the first time in its history, there were two consecutive circuits, resulting in shutting down of the markets for the day.

Nobody I know, managed to get his order through. So much for retail participation.

Till Friday, uncertainty loomed large. There was talk all around that the pre-election rally was headed for a correction and that the results on Saturday would cause the markets to slide once again. The discussions were centered around whether it would retest old lows of 8000 or would it slip to 10,000. All that vanished on Saturday morning. After a neck-to-neck race (in the early hours of counting), that dreadful feeling began to vanish. By late afternoon, there was a change in mood and the gloomy feeling was replaced by happiness. Social networking sites like Facebook and Twitter reflected the growing euphoria. Messages and comments, bouquets and brickbats poured in left, right and center. It was quite something to be a part of the ‘virtual world’, that day. Felt real!

Quite obviously all the pent up frustration was let loose on the markets today. For a change, I received quite a few calls from friends, relatives and clients. It was mostly - Should I sell my mutual funds now? / Are my investments back in the green, since markets have moved up 60%?

What we forget is when had we invested. Most people got in in 2007 and had their NAVs wiped out by 40-50% and in some cases by almost 80% by end 2008. So if your fund had a NAV of 12 when you invested, it crashed to 6. Now all mutual funds missed the up rally from 8000 to 12000. Technically, the market moved up by 50%, but NAVs moved by 20-25% only. So your NAV was only at 8. Where is the full recovery?

Another point to note is that there is actually no direct and perfect correlation between the Sensex (or Nifty) with your NAV. At best, it is a broad indicator of the direction (up or down). The composition (large/mid/small caps) of the fund will decide the quantum and direction of its movement. So there may be days when the Sensex and the NAV may move in opposite directions.

Investors should always remember that selling a mutual fund should not be based on what the Sensex is. It should depend on whether you have reached the goal / objective for which you have made the investment or a fixed percentage of return (which you had decided at the time of investing) has been achieved.