What's the cost of selling equity during a drawdown to fund an emergency?
Scenario
Household has ₹3 lakh in equity MF, ₹0 in emergency fund. Medical event requires ₹2 lakh. Equity is in a 30% drawdown.
Inputs
- Drawdown %
- 30
- Emergency need INR
- 2,00,000
- Equity balance INR
- 3,00,000
- Pre drawdown value INR
- 4,28,000
- Recovery horizon months
- 18
Calculation
- 1.
Pre-drawdown equity value
₹3L ÷ (1 − 30%) → ₹4.28 L
- 2.
Equity sold for emergency
₹2L at current NAV → ₹2.00 L
- 3.
Pre-drawdown equivalent of sold units
₹2L ÷ (1 − 30%) → ₹2.85 L
- 4.
Permanent capital loss locked in
₹2.85L − ₹2L → ₹85,000
- 5.
Value at recovery (18 months out)
₹2L × 1.42 → ₹2.85 L
Conclusion
Selling ₹2L of equity during a 30% drawdown locks in ₹85,000 of permanent capital loss. The same emergency funded from a ₹2L liquid mutual fund balance costs ₹0 in foregone gains.
Tradeoffs
The household 'saved' the few thousand rupees per year of opportunity cost by not having an emergency fund in liquid debt — but pays ₹85K in this single event. Over a 25-year working life, expect 2-3 such events; the cumulative cost dwarfs the parking opportunity cost.