Indian equities have seen a sharp sell-off amid weakness in global equities and the re-introduction of long-term capital gains (LTCG) tax on equities in Budget 2018. The BSE Sensex, which gained around 28% in 2017, has slumped 5% since the Budget on February 1.

The sharpest corrections were seen in BSE mid- and small-cap indices. Market volatility has risen to the highest levels since November 2016. Also, valuations have peaked in the Indian market, making Indian benchmark indices one of the most expensive gauge among peers. So what should investors do?

Do not panic and sell equities

At a time when equities are falling, many may be thinking of stopping their systematic investment plans (SIP) or selling their stocks and mutual units. Do not sell your equity investments in panic. Equities can be volatile and they should be held for long-term. Selling in panic will mean losing out on the long-term returns and also the compounding benefits. If the investor’s goal is long-term, then the current volatility will not matter much and one must stick to the asset allocation.

Experts say a volatile market is a good time to rebalance one’s portfolio. They say that there is still some stream left in the markets and investors should stay put, while allocating a portion of their money to debt. In the current markets scenario, large-cap funds are the most suitable ones. In direct equities, one should look at reasonable companies with reasonable valuations.

The near-term volatility should not be a major concern unless the fundamentals of a particular stock or a sector does not look encouraging. Instead, consider buying more stocks when the prices are low to bring down your overall average price for the shares. Investing in stock market should be seen as long-term as the purpose of investing in stocks is to build wealth.

Brijesh Damodaran, managing partner, BellWether Advisors LLP says, that at all times investors must follow a three-bucket investment strategy. In the first bucket, one must keep money for emergency in liquid funds to meet any cash flow needs for up to three years. The second should be for a time horizon of 5-10 years invested in equity and debt. The third one should be for over 10 years, purely in equity, for long-term wealth creation. “Such a policy will ensure that the market volatility and gyrations does not affect your investing journey,” he underlines.

No safe havens

At present, there are no safe havens for investors amid the market rout. Asset classes such as gold, real estate and fixed income have still not become attractive options for investors. Apart from correction in the equity markets, there has been a bigger correction in the bond markets. As India is still in the early stages of inflation, it bodes well for equities and not for bonds.

Equity mutual funds across large- and mid-cap have given stellar returns of over 20% in the last 10 years. In contrast, even when interest rates were high, rates on fixed deposits were below 10%. Rates on small savings schemes such as Public Provident Fund, National Savings Certificate and Kisan Vikas Patra are trending down almost every quarter. Gold may become an attractive investment option if the correction in equities persists as past trends show gold has a negative correlation with equities. In other words, if equity sees a downturn, then gold is a safe harbour asset and holding the metal becomes attractive.

Equity taxation still favourable

Tax-wise, for small investors it still makes sense to invest in equity or equity-oriented mutual funds. While interest earned from fixed deposits and National Savings Certificates are taxed at the investor’s income tax slab rates, returns from Public Provident Fund, which has an investment limit of Rs 1.5 lakh a year are exempt from tax.

In equity, as per the Budget proposal, LTCG tax on stocks and equity-oriented mutual funds will be applicable on holding over a year and gains of over Rs 1 lakh a year will be taxed at 10%, without any indexation. Also, all gains made before January 31, 2018 will be exempt from tax. Experts say it is very unlikely that small investors will have gains from equity of over Rs 1 lakh every year.

So, before selling equities or stopping SIPs, one must analyse which asset class will give higher tax-efficient returns other than equities.