This year might be the happiest for equity fund holders since the 2019 pandemic dip. If you lightly think about the unimaginable returns the market throws at us, that’s just one thing.
Well, the other is that the market recovered unimaginably quicker after a dip, which is not the norm.
But if the investors have to think that the momentum will persist the same way, then you’ve got to hold that thought. If the risk takers are happily comfortable handling the market volatility today, the question is will they continue doing so if there is a huge correction?
What is a Market Correction?
Corporates do make profits and share price rises, but in between every rise, there is turbulence for a short duration. This turbulence on a decline, which is 10% or more but less than a 20% drop in the price, is called a market correction in stocks, commodities, and indexes.
The market corrections may have a rationale behind them, for instance, during the Ukraine and Russia war.
A housing market crisis was a bear market where the decline of more than 20% was caused by the lending of excess mortgages to borrowers who could not repay them.
But sometimes some corrections may have no justification at all, which may be led by fears in the market. These corrections are ineluctable, which any investor owning a stock might have to face.
It has shocked even seasoned investors and is something a new investor must be no stranger to.
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Investors Need to Think Consciously
A bull market is not as straightforward as investors might think. It’s a run with few hiccups, and hence, being conscious of the correction is essential
Planning how you would face it is more critical than panicking during a downturn.
While being conscious of market corrections, investors also pose this question, “Is this correction a prolonged one, or is it time to buy in the dip? ”
No wonder, thinking of market correction, many investors have also made mistakes that have incurred huge losses. Such as being a prolonged bear investor in a shorter correction and exiting from the bull market earlier.
The fact is, not all market corrections are bear markets. Only those corrections that fell 20% or more are bear markets, and in this scenario, it might take longer to recover, but fortunately, India recovered from the impact of COVID-19 in the shortest time.
Ever since the 2019 COVID crisis, investors have witnessed a faster rebound, but this is not the norm. In the previous scenarios, the market was such that for 2-3 years, investors would get no returns and would feel like they were in infinite darkness.
So far, India has surpassed five bear markets that had a greater than 20% fall and eight of them fell up to 20%, as seen in the nifty 50 index in the last 25 years.
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The Way Out
On average, it takes 245 days in a bear market for an asset to reach the bottom, well it recovers and hits back to the all-time high in 465 days.
That means it takes a long time to make returns on your portfolio when it leads to a bear market. But if it is a market correction, it takes 4 months to gradually fall and recover. This is still tolerable compared to the bear market.
Although being in an equity market invites market corrections, be they small or big. If you are a smart investor, you’d know to hold on to it as long as the stocks that you have in your portfolio are from growing companies. You can either exit at the right time or rebalance your portfolio. Leverage the bear momentum or buy the stock at cheaper prices.
Be that as it may, you can explore new assets if all that takes too much of your energy. A bond is a considerable asset during these times and at any time.
Bonds are different from equity; these concerns are never a matter there. Imagine investing in companies that need your money to grow themselves. In this, there exists a benefit of giving you fixed interest on the sum of money you lend them while they return the principal to you at the end of the contract, or what they call maturity. It is like what the bank does to you when you take out loans from them.
So what essentially can be a risk? Commonly, a borrower might default on paying the lender. That can be sorted if you wisely invest only in companies with great credit ratings, like A, AA, or AAA; likewise, the bank refers to the CIBIL score while lending.
Another risk you might need to consider is the concept of yield and price. When there is an increase in yields, the lending rates for borrowers also become higher. But to keep the borrowing ongoing, the government, at some point, adjusts the yield.
The higher interest rate can mean reduced bond prices for those already holding bonds. Most preferably, investors like you would want to buy bonds that earn higher interest rates, and hence, the price of the previous one will decline. The rise of yields typically depends on the inflation rate, global interest rate hikes, and RBI interest rate hikes.
But during this, you can hold it till maturity to get your interest and principal or sell it at a discounted price and you can wait to invest in the same company selling bonds that give higher interest rates when the yields have risen.
Isn’t this so peaceful? You don’t need to invest in fixed-income assets alone; prefer to diversify your portfolio where at least most of your portfolio can be saved during unpredictable equity market conditions and rise in inflation.
The Wrap
The word “market corrections” is itself panicking, and thinking of facing that situation, in reality, is more drastically insane. So do you have a plan to face market corrections? If not, have one and invest smartly.
At least now, looking back at the previous downturns, it allows investors to learn from the events, but that wasn’t the case a few years back. Now you know what to expect. “Is market correction a serious deal? “depends on how an investor takes the common event of equity holding.
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