Can the value of a mutual fund investment drop to zero?

Is it possible for the investment in an equity mutual fund scheme to drop to zero?
- Mary

It hasn't happened so far but nothing can be ruled out as we live in a very different world. The interpretation of this question is that you give your money to a fund manager who invests in a diversified portfolio of at least 15-20 stocks which by design he has to do because according to SEBI regulations, a fund company cannot have more than say X per cent in a single stock or bond. So, a fund manager must have a diversified portfolio. Now, all the chosen stocks disappear to the tune of being worthless, i.e., they all become zero.

While this remains unlikely, but to answer in terms of how bad things can get, then things actually can get very nasty. It happened in 2002 when many people got excited seeing the growth in technology stocks and soon after, funds companies also launched technology funds. So, the first fund launched went up by 100 per cent in the first year and about another 100 per cent in the second year. Consequentially, it galloped so dramatically that everybody was sucked into it. Then, many fund companies launched their technology fund and most of these funds raised big money from excited investors who had witnessed the past performance of doubling money every year. But their money got reduced by 70 per cent. This meant that their Rs 100 invested became Rs 30 and it took seven years for them to recover Rs 100. This happened to Infosys as well. Somebody who got excited to invest in Infosys in 2001 made no money for the next seven to eight years. So, such things can happen but your investments can't fall to zero.

Turning to zero generally happens when you gave your money to somebody and he/she took out all the money from the bank and put it in a gunny bag and walked away. Now, this cannot happen in a mutual fund. With the whole design, its structure, custodian, etc., in place, such things can't happen. Having said that, I visualise that there are risks in the market but there is no risk in design. And thus, I don't fear such a thing.

This article was originally published on December 09, 2019.