Financial Term of the week- Bear Market

A bear market is one when the financial market witnesses a continuous drop in the prices of the securities. It is commonly used in reference to stocks but can be applicable to any form of security like bonds or even real estate. Bear markets can be spread over several years also and are not short-term lulls in the market.

Knowing more about Bear Markets

When the market is bearish, the investor sentiment is negative, and the companies are not in an expansion or growth phase. Not that there are no gains seen in a bear market; there are, but the gains are not sustained. Bear markets can be cyclical or long-term; while the former may last a few weeks/months, the latter can last for many years. They may be a common sight during a recession or economic downturns, owing to multiple reasons. The supply of stocks is seen to be higher than the demand for them. One can observe scepticism, fear, and at times, a certain rush to protect the investments from losses. Investors also become relatively more averse to risk-taking.

However, the bear market and market correction are two different market phases and must not be confused. Market correction may last for a lesser period as compared to a bear market. Investors may find it extremely difficult to find the lowest phase of a bear market, which may offer a suitable point to invest further. However, in a market correction scenario, investors may be able to find suitable points of entry for investments.

The opposite of the bear market is a bull market when the stock prices are increasing, and the country’s economy is witnessing an overall growth. -.

What does it mean for a mutual fund investor?

Since the equity mutual funds are dependent on the stock market, the bear phase affects mutual funds. When the stock prices go down, the Net Asset Value (NAV), which is the per-unit cost of the mutual fund scheme, also goes down; and vice versa.

Often, it is seen that investors tend to panic when the value of their investments goes down, turning towards redeeming. There are two sides to this. Firstly, no phase in the financial market is permanent. If you are experiencing a bear phase today, past history proves that this shall pass and be replaced by a bull phase. It is just difficult to predict when this happens. Secondly, when you redeem in a bear phase, often you will book a loss because the stocks your mutual fund scheme may have invested in, may have declined considerably in value. It is advisable to stay invested if your investment goals are in line with the fund’s investment objectives. In fact, in times like this, some experts might suggest investing more money in the market. This is because you’d be buying the same units at a NAV much lower than the average NAV. Also, discontinuing or pausing your SIPs (Systematic Investment Plans) may not be a good idea because this is the time when you can buy more units.