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Equity, bond, gold and even Bitcoin prices have all corrected over the last month or so. Crude oil, meanwhile, is rising, which may be part of the reason everything else is falling. But this isn’t a piece on global capital markets. It’s about how a sharp equity correction breeds anxiety in individual investors, and what to do about it.

The recent fall in domestic equities is causing real worry. When I start getting panic calls from my mother and other close friends, I can tell that the damage has hit too close to home to just “do nothing”. Yet doing nothing is the standard advice experts give long-term investors facing short-term volatility, and it is sensibly free of emotion.

But, my mother was on the verge of falling into panic and somehow, I had to get her to step back a few feet. She admitted she was thinking of selling part of her long-term equity holdings, because the correction had pulled down her portfolio’s value. To which, I asked her what she would do with the money she got from selling her equity mutual funds.

Her answer voiced what many investors are probably considering in silence: “I’ll move it to fixed deposits.”

Did she need any of this money in the next year or two? I already knew the answer. Her pension comfortably covers her daily expenses. Her medical costs are largely taken care of by the Ex-Servicemen Contributory Health Scheme (ECHS). She also has substantial liquid assets, part of which is already in fixed deposits and debt funds for emergencies. After a thoughtful pause, she agreed that she didn’t need the equity money anytime soon.

How long would she keep the redeemed money in deposits? “Until the markets recover,” she said. But how would we know when that is?  In the meantime, I ensured that she was aware that deposits carried their own costs. Over the long run, fixed deposit returns barely beat inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More and interest is taxed every year even if you plan to reinvest it. Gains from equities are not tax free either but the tax liability is triggered only at the time of selling. Her funds are still in profit overall, so redeeming now would trigger capital gains tax just when she wanted to preserve value. And later, breaking the deposit to move back into equity could cost her a premature withdrawal penalty.

She looked upset, not because I was vetoing her ideas to preserve capital, but because it seemed like a helpless situation. What could she do?

Back to fundamentals

Start with when you’ll need the money. If you can leave your equity investments untouched for at least two years, the best course is to wait out the correction. If you need some of it within 1.5–2 years and volatility unsettles you, move that portion into a stable return option, even at a lower expected return.

Even if you don’t need the money, a falling portfolio can cause enough anxiety to push you into acting. Before you do, think rationally about what is happening in the markets and why. Broad markets don’t whimsically fall to zero: the Nifty 50 at the start of COVID corrected nearly 40% in a matter of weeks but today is up nearly 2.7 times that value. Prices can stay low for a while, but it’s the overall economic picture that should guide any change in asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More.

Here is what we know on the macro front.  

The economy is still growing. Real GDP growth for the first quarter of FY27 came in at 7.8%. Some have disputed the figure, but nobody denies that growth continues. The IMF recently raised its FY27 growth forecast to 7% from 6.4%. Equity prices are falling, but the economy is not.

Valuations, at least for large caps, look increasingly reasonable. The Nifty 50’s trailing price-to-earnings (PE) ratio is around 19–19.3 times. That isn’t the cheapest it has been, but it isn’t far from the 17–18 times seen at the bottom of the March 2020 Covid crash. Over the last five years, Nifty 50 earnings grew roughly 12–12.5% a year, while the index gained only about 4.5% a year.

In other words, in October 2021 you paid about Rs 27–28 for every Re 1 of aggregate Nifty 50 profit. Today you pay about Rs 19. You’re paying less, not more. And you’re paying less at a time when FY27 earnings growth for the basket is expected at 15–18%, higher than the five-year average. Prices are moving lower; earnings are not.

Again, while market prices are moving lower, earnings are not.

Volatile times also bring a flood of doom-laden predictions. The truth is that nobody can meaningfully predict market levels. What we do know is that foreign investors are selling, largely because higher US bond yields offer them a better risk-free return right now. India isn’t alone in this. Emerging markets, and even some developed ones, have posted substantial losses over the past six months or so.

Large institutional capital has wide market access, information, experience and time, so it can afford to move nimbly in and out of markets. Individual portfolios don’t grow that way. They need the discipline of saving and investing regularly, in quality growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... More that beat inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More. They also need the opposite of nimbleness: staying invested through the noise.

Equity will never deliver linear returns. As I finally told my mother, had she not been invested in equity, and stayed invested through the corrections of the past decade, especially the big one in March 2020, her portfolio would be nowhere near where it is today. If you want to create wealth, you can’t afford to sit outside risk. Stay disciplined, and keep an asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More that suits your goals.