Feb 12, 2018 5 min read

How Can You Use This Time of the Market Correction in Your Favor?

Everyone is talking about Market Correction. What it is and how you can use it to your benefit. Learn here!
Domestic fund managers are all on a shopping spree as the valuations have become appealing after a decent correction in the stock market. Some even believe that it’s a good time to purchase the shares lying in capital goods, automobile, construction, and financial service sectors.

It is the equity markets which are experiencing free fall. Several stocks have seen a dip of more than 20%, and the Nifty index faced the downfall by about 7% in the three days post Budget announcement in India. There were other reasons as well that can be considered responsible for the ongoing correction including the global stocks crash, return of LTCG tax, and budget proposals which expected to push up inflation and interest rates. What this phase has for our investors? We will let you know in detail!

But before proceeding further, let’s understand the concept of market correction first.

What Is 'Market Correction'?

In a layman term, it is one of the negative phases of the market, which arrives when prices of stocks are overvalued due to high liquidity and demand. In such cases, the prices fall after reaching their threshold value. Such corrections in the market can be considered as temporarily as the price declines interrupting an uptrend in the markets or assets in general. Besides, it does not have a long duration as that of a bear market or recession, but it can be a precursor to either of them.

Are Such Corrections Healthy for the Market?

Well Yes! Rather than accepting boom market to become bubble and bust with a painful crash, it’s always better to accept small corrections to find regular attractiveness of the prices justifying the fundamental growth in the backend. Familiar with the fact that stock market is fairly volatile on a short-term basis, it has an exceptional potential to deliver success over the long-term. Many see such corrections as an opportunity for the market and the traders to digest the gains that they have made on a recent basis and this also helps them to avoid a sense of irrational exuberance in the short-term.

In the case of investors, such market movements provide a higher chance to view how comfortable they are with the market risk and this way they can also plan to make changes to their portfolio if needed or warranted. Further, they can potentially add companies at discounted prices, or to dollar cost average down on existing positions.

What’s Experts Take on the Recent Uproar?

Some financial experts comment commented on the situation saying, for the past one year the markets are overvalued to the extent that they did not have any correlation or drew parallel with the fundamentals. And thus, a market correction was long overdue. The fall in the market is justified and was anticipated long back as valuations were too rich.

It is also one fact to consider that the slide of 6 to 7 per cent correction at this point in the market does not solve the entire purpose of market correction nor it has brought the markets back to its fair value. The markets are still moderately overvalued, and this does not imply that it will correct by that much. However, it is also a fact that such equity corrections are not so uncommon. On an average people face the effect of this phase once a year. A massive sell-off of 30% happens every decade or so as well as a fall of about 20% is witnessed once in every few years.

How Can Investors Deal with Such Market Corrections?

Here are the certain ways with which investors can deal with the market movements:

  1. Avoid Panicking Due to Any Sudden Change in the Market 
    We have heard several times that “when in the market, patience is the key.” Investors are advised to avoid panicking due to sudden volatility in the market. It is essential to identify and then remain stick to a few of the good companies to invest. Markets often lead a shift in cycles and this phase too stabilize over time.
  2. Make Sure You Remain Stick to Your Goals 
    The break in the uptrend can be due to several domestic as well as global factors. When fear and volatility are at peak, it becomes even more crucial to remain committed to your goals. In case your asset allocation split some change due to market corrections in one or the other asset, try rebalancing by buying more.
  3. Apply the Right Strategy to Invest 
    For the investors who are more into lumpsum investment than SIP, the phase of market correction can be a part of the bull run, hence it cannot be considered problematic until it remains negative for long days. In different factors, markets will go up or down. In this correction phase, the market is just pushing the bad quality stocks out.
  4. Think Long-Term and Keep a Watch on Your Portfolio 
    Investors who have made investments in SIP with a long-term view should enjoy the phase as such market movements are like a blessing since they can buy units with lower NAVs. Also, keep an eye on your portfolio. It helps you in comprehending the progress you made towards your goals by analyzing the past performance. And this way, you can take investment decision well by monitoring your portfolio at the right time with the help of an advisor.

Special Advice for SIP Investors:

The experts at MySIPonline advice that the portfolio must remain steady even during this time. Just remember that the current developments as well as the changes entail some short-term pain, but it’s also a push required to fulfil the long-term goals. A slight dip today means that you can purchase units and stocks at a 10%-20% discount compared to the last week. The correction is the right time for a prudent investor to look for a bargain in the market. While some may tell you that you may catch a falling knife; be aware of the fact that there is a higher probability of markets being bullish in the long run.

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