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This year might be the happiest for equity fund holders since the 2019 pandemic dip. If you lightly think about the unimaginable returns that the market throws at us, that’s just one factor.
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 a 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-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 a few hiccups, so 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 COVID-19 impact in the shortest time.
Ever since the 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 that fell up to 20%, as seen in the nifty 50 over the past 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, and it recovers and hits back to the all-time high in 465 days.
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 fall and recover gradually. This is still tolerable compared to the bear market.
Although we are in an equity market, corrections are inevitable, whether 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, if all that takes too much of your energy, you’ll explore new assets. A bond is a considerable asset, not only during these times but at any time.
Bonds are different from equity; these concerns are never a matter there. Just imagine being an investor in companies that need your money to grow themselves. This has the benefit of giving you fixed interest on the sum of money you lend them while they return it to you at the end of the contract, that is, maturity. It is like what the bank does to you when you take a loan.
So what can essentially be risky? A borrower might default on paying the lender. That can be sorted out if you wisely invest only in companies with great credit ratings, like A, AA, or AAA, like how a bank refers to the CIBIL of an individual.
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; 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 rather than selling it at a discounted price. The next time, you can wait to invest in the same company selling bonds that are giving higher interest rates when the yields have risen.
Isn’t this so peaceful? You don’t need to invest only in fixed-income assets; you can include them to diversify your portfolio so that at least most of your portfolio can be saved during unpredictable equity market conditions.
The Wrap
The word “market correction” 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 downturn allows investors to learn from the events, but that wasn’t the case a few years ago. Now that you know what to expect, “Is market correction a serious deal?” It depends on how an investor takes the common event of holding equity.
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