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Stock market corrections can be unnerving. A sharp fall in stock prices often triggers panic among investors, making them question whether they should remain invested or exit to avoid further losses.
Our answer? Stay put.
History shows that mutual funds tend to fare better than the overall stock market during downturns. Not only do they fall less, but they also recover faster. Here's why staying invested through market turmoil is the best strategy for long-term wealth creation.
Mutual funds during market corrections
We analysed the performance of actively managed mutual funds whenever the Sensex fell over 20 per cent in the past two decades. Across six major market corrections, the majority of funds in key categories—large-cap, mid-cap, small-cap and flexi-cap funds—outperformed their respective benchmarks.
This outperformance is largely due to the fund managers' ability to pick resilient stocks, avoid stricken sectors and strategically rotate holdings.
How mutual funds perform during market crashes
How mutual funds perform during market crashes
% of funds that have fallen lesser than their category benchmarks
| Category | FII selling (2006) | Global Financial Crisis (2008) | Post -Global Financial Crisis (2011) | Yuan devaluation (2016) | Covid crash (2020) | Current market correction* (2024) |
|---|---|---|---|---|---|---|
| Large cap | 33% | 71% | 70% | 84% | 88% | 56% |
| Flexi cap | 36% | 64% | 64% | 63% | 96% | 56% |
| Mid cap | 83% | 71% | 100% | 50% | 91% | 41% |
| Small cap | 75% | 100% | 100% | 77% | 100% | 70% |
| (*Current market correction is the only instance in the table where Sensex fell by less than 20 per cent as of 19 February.) | ||||||
The takeaway? Actively managed mutual funds provide a cushion during downturns compared to direct stock investments.
Mutual funds recover faster than markets
One of the biggest advantages of investing in mutual funds is their bounce-back ability. Not only do they limit losses, but they also recover to their previous highs faster than the broader market.
Consider the Covid-19 crash in March 2020, when markets fell by over 30 per cent in just a few weeks. Many investors who exited out of fear missed the sharp recovery that followed. Those who stayed invested in actively managed mutual funds saw their portfolios bounce back strongly, often outperforming their respective benchmarks.
How quickly mutual funds recover after a market fall
% of funds that have recovered faster than their category benchmarks after the most prominent depression periods
|
Fund category
|
FII selling (2006) | Global Financial Crisis (2008) | Yuan devaluation (2016) | Covid crash (2020) |
|---|---|---|---|---|
| Large cap | 27% | 47% | 60% | 31% |
| Flexi cap | 46% | 73% | 68% | 100% |
| Mid cap | 83% | 65% | 35% | 57% |
| Small cap | 25% | 100% | 92% | 90% |
The pattern is clear: most active mutual funds recover faster than markets, except large-cap funds, which tend to take longer but offer stability.
If history is any indicator, exiting a mutual fund during market downturns is a mistake. Investors who remain patient benefit from strong recoveries.
What you should do next
1.Stay invested, no matter the market conditions
The biggest mistake investors make is trying to time the market. Data shows that missing just a few of the best days in the market can severely impact long-term returns. Staying invested allows you to participate in market rebounds.
2.Use SIPs to your advantage
If market volatility worries you, investing through systematic investment plans (SIPs) is the best strategy. SIPs help average out market fluctuations, ensuring that you buy more units when markets are down and fewer when they are high.
Even if you invest at the worst possible time, long-term SIP returns (Calculator) tend to smooth out and recover well. What we see in the table below is that even if your returns are poor in the first five years, staying invested for 10 years or more turns losses into gains.
How time reduces market risk
Based on the worst SIP returns of an average fund within the category over respective time periods
|
Years invested
|
5 | 10 | 15 | 20 |
|---|---|---|---|---|
| Large cap (worst returns %) | -9 | 1 | 6 | 13 |
| Flexi cap (worst returns %) | -9 | 3 | 7 | 13 |
| Mid cap (worst returns %) | -12 | 4 | 8 | 16 |
| Small cap (worst returns %) | -13 | 4 | 8 | - |
| Data as of January 2025 for regular plans | ||||
Lesson for you
Markets will always be unpredictable, but history has shown that mutual funds outperform during downturns and recover faster than the market.
If you remain disciplined, stay invested, and continue SIPs, you will benefit from compounding and ride out volatility successfully.
So, the next time the market crashes, don't panic. Stay the course and let time work in your favour.
This article was originally published on March 05, 2025.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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