Ananya stopped opening her mutual fund app in March.
Every time she checked it, the numbers looked worse.
At the beginning of the year, her portfolio had crossed ₹8 lakh for the first time. She had been investing through SIPs for almost four years. Watching her investments grow month after month had slowly made her more confident about money.
And then, the market crashed. Like every major mutual fund market crash India has witnessed, fear spread quickly among investors.
In one week, her portfolio was down by ₹40,000. A few days later, the loss crossed ₹1 lakh. News channels flashed words like “panic”, “sell-off”, and “market bloodbath”. WhatsApp groups were filled with screenshots of falling portfolios. Some of her friends stopped their SIPs immediately. One redeemed their investments completely and moved the money into a fixed deposit.
Ananya kept staring at one question.
If the market keeps falling, what happens to mutual fund money during market crash periods ?
Most people understand mutual funds during rising markets, but they become confusing during falling ones.
A mutual fund is simply a pool of money collected from many investors and invested into assets like stocks or bonds. When the value of those investments falls, the value of the mutual fund also falls. The money does not “disappear” overnight. Instead, the prices of the underlying investments temporarily decline because the market believes they are worth less at that moment.
Think of it like owning a house in a neighbourhood where property prices suddenly drop. Your house still exists. But its market value has changed because buyers are willing to pay less during that period. Mutual funds work similarly during a market crash. The investments remain inside the fund, but their current market prices fall sharply.
Why Market Crashes Feel So Intense
What makes crashes emotionally difficult is speed.
Markets usually rise slowly and fall quickly.
A portfolio that took three years to grow by ₹3 lakh can lose that amount in three weeks during panic selling. And because mutual funds show updated values daily, investors experience every fall in real time.
Take Karthik, a 29-year-old IT employee in Bengaluru. During the bull market of 2024 and 2025, his small-cap mutual funds delivered impressive returns. His ₹5 lakh portfolio grew to nearly ₹7.8 lakh. For the first time, investing felt exciting. He started checking returns daily. But when markets corrected sharply, his portfolio dropped below ₹6 lakh within months. Suddenly, the same investments that once looked “high growth” started feeling dangerous. He redeemed his funds out of fear and moved the money into savings. Six months later, markets recovered significantly, but Karthik had already exited after locking in losses. The crash itself hurt him less than the panic-driven decision during the crash.
Then there is Meera from Pune. She had started a ₹15,000 monthly SIP in an index fund in 2021. When markets fell sharply later, she became worried seeing negative returns on recent investments. For a while, it felt pointless continuing her SIP when every instalment seemed to lose value immediately. But without realising it, her mutual fund SIP during market fall periods was buying more units at lower prices. This is one reason experts often discuss the benefits of a SIP during falling market conditions and explain why do SIPs buy more units during market falls.
Volatility and Failure Are Not the Same Thing
This is where many investors confuse mutual fund volatility vs failure. Understanding what is the difference between volatility and permanent loss is critical during market crashes.
Volatility means prices moving up and down rapidly. Failure means the investment permanently losing value with no recovery. These are not always the same thing.
Historically, markets have experienced crashes multiple times. During the 2008 financial crisis, during the pandemic crash of 2020, and during several major corrections in between, mutual funds linked to equities also fell sharply. But over long periods, markets have historically recovered and continued growing. The emotional challenge is surviving the fall without making permanent decisions based on temporary fear.
This is where mutual fund behavioural finance becomes important in understanding investor decisions during volatility.
Behavioural finance explains this through something called mutual fund loss aversion. Understanding how does loss aversion affect mutual fund investors helps explain why many people exit investments during temporary market declines.
People feel the pain of losses much more strongly than the happiness of gains. Losing ₹1 lakh emotionally hurts more than gaining ₹1 lakh which feels good. During crashes, this emotional imbalance pushes many investors toward panic decisions. Selling feels like relief, even when it damages long-term wealth creation.
Social behaviour also makes crashes worse.
When everyone around you is talking about losses, uncertainty spreads quickly. One friend pauses SIPs. Another shifts entirely to gold. Someone forwards predictions about “markets crashing another 40%”. Slowly, fear becomes contagious.
Different Mutual Funds React Differently
During a mutual fund crash investors usually see equity mutual funds fall the fastest because stock prices react sharply to uncertainty. . Debt mutual funds, which invest in bonds and fixed income instruments, may behave differently depending on interest rates and credit conditions. A mutual fund hybrid fund usually falls somewhere between equity and debt fund behaviour because hybrid funds combine multiple asset classes.
The important thing is that a mutual fund crash is usually a reflection of what is happening in the market, not necessarily proof that the mutual fund itself is broken.
Still, crashes expose something important about investors.
People often discover their real risk tolerance only after seeing losses.
Market corrections often reveal an investor’s mutual fund real risk tolerance, which can feel very different from expected risk on paper.
A portfolio that sounded aggressive and exciting during rising markets can suddenly feel unbearable during a downturn. That emotional reaction matters because investing is not only about returns. It is also about behaviour during difficult periods.
Before assuming you are comfortable with market risk, it helps to ask a few honest questions.
- Would you still continue your SIP if your portfolio fell 25% this year?
- Do you check your investments more frequently during falling markets than rising ones?
- If markets crashed tomorrow, would your first instinct be to wait or to exit?
If even one answer feels uncomfortable, the issue may not just be the market crash. It may be the gap between the risk you thought you could handle and the risk you are emotionally prepared for.
What Long-Term Investors Eventually Realise
Ananya eventually opened her app again.
The numbers were still lower than before. But something had changed. Instead of checking daily losses, she started reading about how markets behaved during previous crashes. She realised her mutual funds had not “vanished”. They were simply moving through the same market cycle that every long-term investor eventually faces.
Today, her SIP still runs every month.
The market still rises and falls. Some days sharply.
But market crashes often reveal the real nature of mutual fund investing. The gains attract attention during bull markets. The falls test conviction during bad ones. And somewhere between fear and patience is where mutual fund long term investing quietly takes shape.
Disclaimer: The information provided in our blogs is for informational purposes only and should not be construed as financial, investment, or trading advice. Trading and investing in the securities market carries risk. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Copyrighted and original content for your trading and investing needs.
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