I have just started investing in MFs how much loss should I be prepared to face?

Published: October 24, 2021 at 6:55 am

Last Updated on October 24, 2021 at 6:55 am

Sriram has an interesting question: “Dear Pattu sir, thanks to your articles, I have just started investing in equity mutual funds with a 15-year goal. For the fixed income part, I would like to use a combination of fixed deposits and gilt mutual funds”.

“My asset allocation is 50% equity and 50% fixed income. As a newbie investor, I am scared of market crashes. Can you please write an article on how much loss a long-term investor should expect during the investment journey and how to prepare for this mentally?”

First, let us consider past data to appreciate the loss we expect from equity or equity mutual funds in an investment portfolio. Then we will get to the hard part – preparing for this, first via prudence and then look at the mental aspects.

When it comes to investment return expectations, past performance is not an indicator of future performance. However, when it comes to investment risk expectations (for those who bother to), risk in the past is the bare minimum we should expect in the future.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

So for a 15-year investment duration, the maximum loss a 100% equity portfolio has suffered in the past is 61% (maximum drawdown). This is one aspect of risk. The other is time. The longest duration for which the portfolio was below an all-time high (max underwater) was 40 months! That is three years and four months!

So for a 50% equity 50% fixed income portfolio, the maximum drawdown (MDD) expected is about 31%. That is, the entire portfolio is reduced by 31% at some point (not just the equity part!)

In backtesting with Sensex and a gilt index as the portfolio components, the MDD was also 31%. When the gilt is replaced by a constant interest rate (a proxy for an FD), the MDD is about 31%.

The maximum underwater duration was 22 months with gilts and 27 months with FD.  That is, the entire portfolio underwater for about two years (not just the equity part!)

Notice how the volatility of gilts helps lower portfolio risk better than a fixed interest instrument. Read more: If equity MF returns are negative, will gilt MF returns be positive?

Asset Allocation Risk Matrix

Next, we present a risk asset allocation matrix. This is the minimum risk an investor must expect to face in terms of loss of value or loss of time for various equity exposures.

Please note that it is childish to presume loss is notional. Until we redeem, both losses and gains are notional! Real-life is a lot more complicated than what mutual fund guys would have us believe.

Depending on the sequences of returns studied, the actual loss one would face may be higher or lower than this.

The maximum drawdowns of the entire portfolio for different equity allocation is shown below when gilts and fixed interest instruments are used for the debt component. The numbers for any other debt fund can be reasonably expected to be in between these two extremes.

Equity exposureMDD giltsMDD FD

The continuous months the entire portfolio was underwater for different equity allocations is shown below when gilts and fixed interest instruments are used for the debt component.

EquityCUW giltsCUW FD

How to prepare ourselves for this loss?

A two-step process is necessary here: prudence and mental training.


The following steps will remove a significant chunk of uncertainty associated with the stock market.

  1. Know when exactly you need the money
  2. Have a realistic estimate of inflation
  3. Don’t expect too much return from equity or debt.
  4. Don’t forget about taxes!
  5. Choose an asset allocation with a good chunk of fixed income: 40 to 50%.
  6. First, compute the expected portfolio returns after tax for this asset allocation. Then compute the investment required. For an example, see: Retirement plan review: Am I on track to retire by 50?
  7. Have a plan to systematically de-risk the portfolio with rebalancing and varying the asset allocation. For an example, see: I am 30 and wish to retire by 50; how should I plan my investments?
  8. Learn how to review your portfolio effectively. See, for example, How my retirement portfolio has performed in 2020: personal finance audit.
  9. Invest systematically regardless of market conditions. Also, see: Myth Busted: Investing during market dips will result in more returns.
  10. Invest as much as possible, increasing your investment by at least 10% each year.
  11. Unfollow all financial news, in particular, freefincal.com and develop a productive hobby or alternative income streams. Read more: How to earn one lakh a month passive income?
  12. All you need is 30 minutes a year to review your portfolio.

Mental Training

How to get used to market loss?

We are emotional beings, but we need to be emotional about the right things. For example, after I started investing for the first few years, my equity portfolio return was zero (I didn’t know the overall portfolio return at that time).

The only reason I kept going was because I was emotional about the future. I was ready to face loss in the short term for an opportunity to change my social station in the long term, and it paid off. My journey: driven by the fear of making the same mistakes again.

A counterintuitive way to get used to market loss is to embrace it wholeheartedly. Today you are losing Rs. 100 or Rs. 200 per day on your equity investments.

Tell yourself that you look forward to the day when you would lose thousands per day and then ten thousand per day and then lakhs per day and then crores per day. Meaning you also stand to gain the same kind of amounts.

Do everything possible to prudently manage risk on auto-pilot and embrace the loss as a necessary step on your way to becoming a multi-crorepati.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)