5 things to do when stock market senses a big correction

By: |
April 27, 2021 5:43 PM

Here are five key things that equity mutual fund investors may do when the stock market senses a big correction.

stock market correction, equity mutual fund investors, Sensex, Nifty 50, SIP, Asset allocation, returnsAs has been seen in the past, equities tend to drift upwards over the long term.

The Sensex and Nifty 50, the two leading barometers of the Indian stock market seems to have taken a bit of a start after a long pause. There was buying seen in the broader market and the indices were up by over 1 per cent. Both the indices are hovering around their all-time-high levels but appear to be undecided in their short term movement.

The volatility since the start of 2021 has been high and goes with the trend witnessed in the global markets as well. The recent upsurge in the coronavirus cases is also keeping the stock prices in tenterhooks as far as the short-term is concerned.

While both Sensex and Nifty 50 are above 50 per cent over the 12-month period, the YTD return is around 3.6 per cent for Nifty 50 while Sensex has gained about 2.5 per cent till date this year. For a long term equity mutual fund investor, the short term volatility and the events surrounding the stock market valuations need not be a matter of concern. As has been seen in the past, equities tend to drift upwards over the long term.

But, if you are still worried about a big correction in the market, here are a few things to keep note of:

1. Years to goal

If your goals for which you have been investing all these years are near, its time to start the de-risking process. In de-risking, you start shifting money from equity funds to less volatile debt funds. This is to make sure you preserve the accumulated growth of your capital.

2. Systematic transfer plan (STP)

As far as fresh investment is concerned, you may consider allocating your money intermittently into the market. This will help especially if you have a large amount to invest as a lump sum. By investing in instalments you bring the risk down but at the same time, any uptrend may prove futile. Still, the strategy of a Systematic transfer plan (STP) may work when the markets are at a high or experiencing high volatility.

Under STP, funds from one specific scheme get diverted into another scheme of the same fund house for a pre-defined amount and at a pre-defined interval. STP comes in handy as funds would initially get invested in a specific low volatile scheme such as a liquid fund and from there a pre-defined amount keeps getting invested into the equity scheme of the same fund house at regular intervals.

3. Keep SIP running

The MF investors, investing through a Systematic Investment Plan (SIP) may continue with them. SIP’s are not making your funds get exposed to market volatility all at once. When the index is down, you get more units and when the index rise, the units bought is less. This approach helps in accumulating units, the average cost of which is lesser than otherwise.

4. Emerging themes

In the post-covid world, a lot of companies are expected to do much better than before while some may struggle to find their feet. Technology and pharma are two sectors that appear to be on the front-line while a few others may also throw long term opportunities to the investors. However, investing in sectoral or thematic funds comes with its own share of risks and needs a much frequent review than other equity diversified funds.

5. Asset allocation

Many studies have shown that portfolio returns depend largely on the allocation of assets in the portfolio. It’s the allocation between different asset classes such as equity, debt, real estate, gold that will determine the final output. Re-balancing of asset allocation is, therefore, an important exercise in investment planning.

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