With NIFTY touching 16,500 the most commonly asked questions I have received are – “What should I do now? What if the market starts making corrections? Should I stop my SIPs?
Let’s start by exploring this into pieces.
What is a market correction and how much it could impact your investments?
Generally, market highs, driven by the rapid influx of positive sentiments, undergo a correction to “suppose to be ideal” levels time by time. Based on 2008 crash numbers, the impact of correction could be as severe as dropping your 5 Yr 30% positive yield to negative in a quick period. Nevertheless, we are past 2008 and anything similar could only be a fantasy.
On top of this – the real question is: is the market overvalued?
Well, in our recent article we tried to give a check on how P/E is declining with NIFTY making all-time highs. Though the market is increasing, it is supported by strong earning posted across the board. Ideally, we invest in the future and though NIFTY looks way too high, it might not be the case when you think about the numbers for NIFTY post 10 Yrs.
What you should do in case the market is approaching a near correction?
Even if we say the market might be moving at the expected pace, the volatility/correction is driven by factors beyond simple P/E. The answer to the question of “what to do if a market correction approaches?” is simple – DIVERSIFY. The biggest thumb rule in investing is diversification. Diversify your portfolio into blue-chip equity-tied mutual funds if you believe the market is due for a mild correction. Think about allocating more of your asset into debt funds and maybe increase some exposure to gold. In case you think the market is overvalued and is expected to take a big drop, pull out and liquidate some of your high-risk equity investments. Hedging is important, “but timing the market with your whole portfolio is a pointless exercise”, feels Abaneeta Chakraborty, UHNI Family Consultant. Kalpen Parekh, MD & CEO at DSP Mutual suggests, “At such extreme highs (which occurs once in a decade), we can invest in defensive funds like dynamic asset allocation funds/ funds that have some amount of safety cushion of fixed income – like equity and bond fund or equity savings fund and can also look at gold for some diversification.”
Should you stop your SIPs?
It depends on your investment goal and horizon. If you are investing for particular goals with time mid to long time horizon, stay. Though the market might make some corrections the long-term net impact of this correction is expected to be minimal. But, if you have invested for a shorter time horizon, think about liquidating some of the investments into cash and some into more defensive funds.