May 26, 2025

Just in the recent past when we witnessed a correction in the markets, thanks to the tariff tantrum, I received many phone calls not only from my clients but also from my friends (yeah! my friends who will soon become my patrons). During my conversations with my acquaintances, I realized that not all of them had similar losses in spite of being investors in the same equity market. The current season seems to have been extremely volatile for many, a bit volatile for some and not so volatile at all for a few. Some are experiencing higher losses and some lower. Now how does this happen when all investors are dealing with the same equity market. Then why this discrimination? The nation wants to know!

I found similar investor experiences when I attended a webcast, the speaker being a C.E.O. of a leading Mutual Fund Company. He stated that different equity investors have different levels of loss in the current correction. Those who had commenced investing during the Covid induced lockdown were staring at huge losses, those who were investing in direct equities had lost 40 to 50% of their gains and there were some who had lost just 10%. Well 10% is also a loss, but when we see others correcting more, we do heave a sigh of relief for 10 %. It is like in your school days, you still felt good after scoring just 50 out of 100, just because your bestie scored only 40!

Post Covid era

Ever since we had a Covid enforced lockdown, we had a new generation of investors flocking to the Indian stock markets. We saw a surge in the number of new demat accounts opened and also huge inflows coming via the Mutual Funds. (demat being a medium for investing in individual stocks). Amongst the new tribe, few had a bountiful of funds to invest, some with limited and many who borrowed to invest. The bottom line was they all had time on their hands and wanted a slice from the fabled wealth created by investing in equities.

A choice one cannot refuse!

What was evidently common with the majority of this new community was that they were largely chasing small and mid-caps or investing heavily on momentum stocks. Moreover, the bulk of the new generation of investors approached the markets on their own and not under any professional advice. By the way, the Mid & small caps had borne the maximum brunt in the recent sell off. Some stocks from this segment had corrected in excess of 50%. And needless to mention, a great number also had leveraged themselves by tapping the derivative tools called Future and options. Here, some have lost their shirts as well!

At the same juncture, we have a set of investors who had invested in managed money products and portfolios. They took the advice of someone who was investing on their behalf, a person with a track record in investing, someone who has witnessed and studied market cycles, someone who most importantly knew what to avoid. Such famed personalities are popularly known as Fund Managers. And, such managed money products are popularly known as Mutual Funds (MFs), Portfolio Management Services (PMS), Alternate Investment Funds (AIFs) and so on. Now you might be wondering how one escapes losses when you are investing in the same market?  

Such so-called managed fund portfolios have also experienced corrections. The losses vary from 10% to 18% depending on the category. But definitely not as high as the set of investors who were investing directly on their own in equities, especially the ones chasing individual small and mid-cap stocks. A loss in a large cap Mutual Fund of 10% is still manageable in comparison to the losses from direct equity investing which are as high as 50-60%. So how does this happen?

Risk Management

A professional fund manager sticks to the mandate of the fund and does not get swayed by the surrounding conditions. They also have certain limits which restrict the stock and sector allocation at all times. They essentially are risk managers and not wealth managers alone. You cannot avoid corrections but one can definitely manage portfolios better with better management of risk.

When markets are on an uptrend, we often put risk management on the back burner. This is especially true when we manage equities on our own. You are your own boss and you alone are responsible for the progress or otherwise. However, such mis management on risk does not happen in managed funds which are heavily regulated. There is a constant audit to ensure there is compliance on the set regulations. Moreover, the portfolios, i.e. the money invested is shared with the clients and public on a regular basis.

Seek help from the respective professional

When it comes to investing directly into equities, i.e. buying individual shares from the stock exchange via your trading and demat account, we sometimes get carried away with our initial success. This happens more often in bull markets and the post covid rally was one hell of a rally, with the many first-time investors tasting success from their first investing experience. One would have just opened a demat and trading account and bought a share randomly without studying the stock and then witnessed a major upswing in the price in just a few trading sessions. This might have happened due to some reasons which the investor was completely unaware of. It was nothing but rookie luck. But this same luck can sometimes give us confidence that we can now master the stocks. One might then get into extensive reading to justify his or her stock selection.

At this point, one begins to think and believe that he is going to be the next Rakesh Jhunjhunwala, the bull icon of Indian equities. Mr. Jhunjhunwala, yes, was a great investor and believer in the Indian economy. He understood the markets better than many of us. But he also knew how to respect the market, he knew when to trade and when to invest and when most importantly when not to. He had candidly also shared that he made most of his money by short selling shares. He was truly a professional fund manager. He ate, drank and would breathe equities.

But what about individuals who have their own careers but in different fields? Can they eat, drink and breathe equities? No, they cannot. A Doctor has to focus on his subject of medicine, a scientist has to focus on research and development, a coffee planter on his plantation, an architect on his building designs and so on. They need to consult the person who understands equities, who can advise on managed products based on your risk appetite. Even different Mutual Funds have incurred different levels of losses in the current season. So, you definitely need someone to guide you if you are not familiar with the subject. I for a fact would visit a doctor if I’m having a fever for more than a day and rather not head out to the medical shop to self-medicate. After all, today's fever can turn fatal.

At the same time, I’m not advocating that direct equity investing is something that we should avoid at all times. Investing in equity is like dealing with fire. We all know that fire by itself and not being controlled is dangerous. But can anyone live without fire? Fire is needed from heating to eating. In fact, the ability to create and regulate fire revolutionized the way mankind progressed. It provided warmth, protection, enabled ways of cooking and also helped in developing tools. Fire hence is useful only when it is controlled and regulated. For e.g. just imagine we had to cook our food on a glowing pyre right at the center of our fancy kitchens. Forget burning the food, we would have given reasons to our neighborhood to call for the fire brigade. Right? Instead, what the nation does is, they regulate fire for cooking by using a stove.

Conclusion

This is precisely the role of a Fund Manager who manages your money in regulated products like Mutual funds, Portfolio Management Services (PMS), Alternate Investment Funds (AIFs) and so on. Just like fire, equity by itself can lead to destruction of your funds as it is a volatile asset and hence considered risky. Just because it is risky, should one avoid it? It is a similar choice of accepting to live without fire. Equities when managed well by taking into risk control measures and following set guidelines can not only beat inflation but also create wealth for you in the long run.  The approach to equity by using professional guidance makes it a worthy tool for creating wealth. For someone who is beginning his journey in investing, they should ideally tap the Mutual Fund route. For someone who is having a higher risk appetite should seek the Portfolio Management Services route and someone who has larger portfolios can look at allocating to Alternate Investment Funds.