Market Turbulence: Should You Stay Invested or Make a Move?

What are the main reasons behind the current market decline?

After the market has fallen sharply in a brief period of time, market participants, brokers, commentators, and editors - like me - are able to invent reasons. The primary reason which has been cited in the context of this big fall is that the Federal Reserve decided not to cut rates. It is very confident about the outlook for the economy.

Besides that, crude oil prices and uncertainty around the new presidency in the US, which can have implications for the domestic market, are also factors. But my sense is that except for the fact that foreign investors were pulling out money from a bunch of stocks, and a good part of the Indian market might not be very cheap - I can't say very expensive, but it may not be very cheap - this led to the big decline.

However, I don't see a significant reason why the Indian market will go into a tailspin. I do not visualise a situation like October 2008, when the market fell by 10 per cent and then fell by another 10 per cent. We are not facing any calamity. Things look reasonably good. Some companies are not so cheap, and many companies have not given any meaningful return.

When I look at some of the large companies in the domestic arena and the kind of companies that have been getting money in the domestic market, they are completely different from the bunch of stocks where foreign investors invest. That is why the domestic investors' experience of the market fall may be completely different from what we see in the broad market. The market fell about one and a quarter per cent, which was significant, but individual investors might have faced a much more severe decline if they held mutual funds or their own stock portfolios.

Suggested read: How to deal with the stock crash?

How have markets recovered from previous downturns?

I can actually look back and analyse some major market downturns. After 1992, the Great Indian Scam led to a complete distortion. There were no FIIs; FIIs were only permitted to enter India and were just beginning to come. Most Indian companies were also dying. We saw a drag of 10 years. The market achieved a level of 4,000 in 1992, and it took 10 years to regain that level.

Then came the great Indian technology boom in 2000, with companies like Infosys, Wipro, and Satyam growing rapidly. In their initial years, they grew by 30-40 per cent, and their stocks went up by many multiples. However, in the exuberance, their valuations rose dramatically, leading to a fall. For another 10 years, these technology companies did not make a comeback in the stock market, though they continued growing well.

Then came the 2008 crisis. Although there wasn't a crisis in India, the US crisis had a severe ripple effect in India. Before that, from 2004 to 2008, India saw an infrastructure boom, and when the global financial crisis happened, foreign investors pulled out, causing disaster. In 2008, the role of FIIs was very significant.

Suggested read: Are FIIs leaving India?

The Sensex, which was around 21,000 in January 2008, fell to 8,500 - a stomach-churning fall. The market lost ground built over the previous two to three years. However, the real problem is that most individual investors get excited at the peak and then put their money into it.

This time around, the market is fairly broad-based. The whole market is expensive, and we have seen small-cap funds making huge leaps, propelled by domestic investor participation. Many small-cap funds now hold over Rs 20,000 crore, which is no longer "small." While volatility can last for years, it will only be bad for short-term investors. If you can stay invested, it won't be all that bad.

If you have been investing when it was expensive, it is even more important to invest when things are cheaper. Continuing SIPs ensures rupee-cost averaging, which helps mitigate the impact of volatility over the long term.

What tools or strategies can investors use to manage their portfolios effectively during this period?

One is that investments should be long-term. If you need the money in three weeks, you are in trouble. Time should be on your side. The second is diversification. In good times, people tend to focus on recent top performers, which can be devastating if those holdings see a major decline. Third, rebalancing is crucial. Value Research can help with this. If you are a long-term investor with 10 years to invest, keep 75 per cent in equity and 25 per cent in debt. If your equity allocation rises to 85 per cent, reduce it.

Suggested read: Real, practical asset allocation | A matter of balance

What should investors avoid during periods of market correction?

Don't sell. When there is a grand sale in stores, people rush to buy, but in the stock market, they run away. In fact, the sale happens because everyone wants to sell. Don't do that. Stay calm, stay invested, and don't log into your portfolio frequently.

Viewer's question

I have 12 years left before my retirement from a pensionable job. Now, I have kept a lump sum in Bank FD, and the monthly interest is invested in Flexicap,, Small cap, Mid cap, and Momentum mutual funds (total six funds). My equity investment is 33 per cent of the lump sum in an FD. Do I need to increase equity exposure?

One is that he has optimised himself with a third of his money in equity, and he has accumulated the sum very nicely, in an almost risk-free way. And that is the psychology that I don't agree with, but that's fine. The end result is that you should get used to equity, and you should have a sizable exposure to equity.

Now, the point is - is it good enough? No. When you are investing, your equity investment should be for the longest period, and your fixed income should be for a shorter period because there is no risk of capital. But he has done the opposite - and he has done it successfully.

He has made a fixed deposit, and the interest he is earning, he is investing that interest income from that fixed deposit - which is taxable - into six equity funds.

Now, I have one small suggestion for him because I am a stickler for simple strategies. The low-maintenance way is that if he buys one multi-cap fund, that is good enough. Or he buys an index fund and one small-cap fund - that is also good enough. If he buys an index fund, that will reduce his cost substantially. Today, you have a Nifty fund which is available at 10 basis points, whereas a normal actively managed fund - even on a low-cost basis - will be about 60 to 75 basis points. So, you have a half per cent advantage all the time.

In the long run, reducing expenses, gaining diversification, and investing regularly is the key.

I would suggest that, at this stage, his allocation to equity should be the reverse. Here, 33 per cent of his money is in equity, and 66 per cent is in fixed income. Given that he still has 12 years to go, it should be the other way around. Only when he retires, given that he is conservative and wants to be reassured of his capital, should he reduce it to 33 per cent. Right now, I think he should actually take it up to 66 per cent, simplify his portfolio, and target this kind of allocation upon retirement.

Also read: Mid-cap or small-cap funds: Which suits your portfolio best?

This article was originally published on January 17, 2025.