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Each time the share market crashes, there are screaming headlines to the effect that investors’ wealth to that extent has been eroded. One such headline doing the rounds today is investors’ wealth to the tune of Rs 7 lakh crore wiped out or words to such effect. To be sure, such dramatisation helps capture reader/viewer attention but at the end of the day has the effect of misleading and wrongly educating the uninformed or the laity. Here is why:

•Share market is a zero sum game---When the seller loses, the buyer gains and vice-versa. A buyer is as much an investor as a seller (even though strictly speaking he is a disinvestor) so much so that to explain away loss to sellers as loss to the economy is just plain disingenuous and unfair to the buyers. Buyers may be bargain hunters or optimists whose take on the long term is upbeat.

•Every appreciation or gyration does not amount to gain or loss; at best it can be a notional loss or gain. To wit, if a person got a share allotted at Rs 10 which gained from strength to strength and reached the peak of Rs 100. And let us say the scrip starts its downhill course and hits Rs 20 in the market over a period of time or suddenly due to macro economic factors.

It is wrong to blame the market for his misfortune in not being able to book the full value of appreciation. Ideally he should have sold at Rs 100 in which case he would have made the maximum possible profit of Rs 90 during this period. But then that would be in hindsight. The point is every gyration is not a profit or loss unless it is booked. In the above example, if he had sold out when the scrip had progressed to Rs 50 or regressed to Rs 50 from the dizzying heights of Rs 100, he would have in either case booked a profit of Rs 40. It would be wrong to say his wealth was wiped out when he didn’t book the maximum profit of Rs 90 or stayed put despite the steady decline in the quotation.

•The mutual fund industry publishes Net Asset Value (NAV) each day which is nothing but the book value of each unit calculated on the basis of taking the market value of the entire portfolio of the scheme at the end of the day as the numerator and dividing it by the quantity of units. The fund manager who churns the portfolio intelligently by booking profits and shifting to other potentially profitable avenues is hailed as savvy and intelligent. But a sudden market crash due to endogenous factors could make him a villain in common with other fund managers. Therefore, if a unit of a scheme commands a NAV of say Rs 200, and the one who bought it during an NFO at Rs 10 would have booked a profit of Rs 190 but the one staying on would only have made a notional profit of Rs 190 to boast.

Therefore to say the ‘nation has lost wealth’ is a huge exaggeration bordering on scaremongering. At best it can be considered par for the course in the manner of a news channel making ‘the nation wants to know’ its signature tune, admittedly a huge exaggeration. Be that as it may, even in the recent Chinese share market crash, the nation did not lose wealth because while the sellers, predominantly individuals, lost their shirts but the buyers, may be institutions who came to staunch the bleeding, benefitted correspondingly which of course would be proved only in hindsight.

For those who have not panicked and sold out, there would be notional erosion in the value of their portfolios. They would be hoping for a quick recovery. Large stock schemes and index funds of mutual funds would have lost more because they by and large invest in the bellwether Sensex or Nifty shares. Mid-cap schemes, however, would have insulated the unit-holders because the market crash would not have been as pronounced in respect of mid-cap shares as compared to shares belonging to the Sensex basket. Diversified schemes too succeed in stemming the rot because they are the ones who strictly adhere to the mutual fund signature tune and watchword----don’t put all eggs in one basket.

The fund managers of open-ended equity oriented schemes are normally at their wits’ end when the market crashes because redemption pressure comes to haunt them. Close-end scheme managers are immune from this pressure. In an open-ended scheme, a unit holder can enter and exit anytime and the fund manager has to mobilise sufficient funds to meet the burgeoning demand for redemption. This then sets a vicious cycle----more selling not as a wise or strategic disinvestment decision but out of sheer compulsion to meet the demands of those exiting. It is time the financial press gave a more nuanced account of stock market crashes though it must be conceded that the hype resonates with the mood of the nation.