Some of the Nifty 50 stocks have fallen between 10 per cent and 20 per cent over the last one year. Similarly, within the Nifty 500 universe of stocks, some stocks are down between 25 and 60 per cent over the last 12-month period. So, should one keep holding them or sell them? The decision will depend on several factors – here’s another angle to look at the maths of gains and losses in an investment that may help you make better informed decisions.
For an investment which has fallen by 15 per cent, it needs to gain 18 per cent to break-even. Similarly, if you hold any share, equity fund or if your portfolio is down by 50 per cent, the recovery has to be 100 per cent for achieving the original value. The bigger the fall, the more will be the required gains.
For example, let us consider a portfolio value of Rs 100 as on on January 1, 2022 and by the end of March 31, 2022, it is down by 25 per cent, i.e. Rs 75. Now, for the portfolio to recover back to Rs 100, it has to gain 33 per cent.
After a 75 per cent fall, the gains have to be 300 per cent.
After a 50 per cent fall, the gains have to be 100 per cent.
After a 35 per cent fall, the gains have to be 54 per cent.
After a 25 per cent fall, the gains have to be 33 per cent.
After a 15 per cent fall, the gains have to be 18 per cent.
After a 10 per cent fall, the gains have to be 11 per cent.
Formula to restore loss percentage
The mathematical relationship between losses and gains is a reciprocal one.
Formula for required % gains to restore loss:
((1 / (1 – % loss)] – 1) * 100
= ((1/(1-75%))-1)*100
=300%
If your mutual fund scheme is underperforming the benchmark, category average and even its peers even after holding the fund for a long period, you may consider switching to a consistently performing fund after consulting your financial advisor. Similarly, some investors continue holding a stock even after the share price has fallen a lot.
Selling a loss making investment needs careful evaluation and should never be on an ad-hoc basis. However, knowing the maths for a loss to recover into gains may help you in making a decision. If you still have conviction for the stock or fund to recover over time, it could be better to add at the lower levels.
