The stock market has been on a downward trend ever since reaching its all-time high in September, with a correction of nearly 15% erasing a significant portion of investor gains. This persistent decline has left investors grappling with market volatility, searching for ways to make informed investment choices while navigating uncertain conditions.
Several factors have contributed to the market downturn. One of the latest triggers is the announcement of fresh import tariffs by US President Donald Trump, which have been imposed on key trading partners such as Canada, Mexico, and China. These trade barriers have sparked concerns over global economic stability, affecting investor sentiment across markets.
Trivesh, Chief Operating Officer at Tradejini, highlighted that the decline follows the broader trend of global markets turning negative in response to Trump's tariff announcements. "Despite strong domestic institutional buying and limited selling by foreign institutional investors (FIIs), Indian markets have reacted negatively to the global trade uncertainty," he said.
A particular area of concern is the sharp fall in mid-cap and small-cap stocks, which have been disproportionately affected. Trivesh pointed out that understanding who is offloading these stocks is crucial. "If retail investors or mutual funds are selling, it could indicate profit booking or capital reallocation. However, if institutional investors are aggressively selling, it may signal deeper concerns about earnings visibility and liquidity in these segments," he explained.
What to Consider When Choosing Stocks
During a market downturn, investors must be strategic about stock selection to minimize losses and maximize long-term gains. The right stock-picking approach can help protect portfolios from further erosion while positioning for future recovery.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, emphasized the importance of management quality during bearish phases. "One thing that is extremely crucial in a downtrend is management quality. Investors must also focus on factors like order book visibility, balance sheet strength, and valuations. Even if a stock has strong growth potential, the price you are paying for that growth is important," he noted.
Investors should seek out companies with strong fundamentals, low debt, and a track record of navigating economic slowdowns. Sectors that exhibit resilience during downturns, such as pharmaceuticals, consumer staples, and select IT services, could offer better stability.
For those wary of investing directly in individual stocks, mutual funds can provide a more balanced and diversified approach. However, selecting the right fund during a correction is just as critical.
How to Pick Mutual Funds in a Market Correction
Raghvendra Nath, Managing Director of Ladderup Wealth, emphasized that market corrections present opportunities for long-term wealth creation, provided investors remain disciplined in their approach. "During market downturns, it is crucial to seize opportunities by continuing your investment plans. However, this phase demands more careful selection of mutual funds. Investors should have a clear understanding of their financial goals, current portfolio allocation, and risk tolerance before making investment decisions," he advised.
When picking mutual funds in a volatile market, here are key factors to consider:
1. Investment Horizon
- If investing for the short term (2-3 years), hybrid funds like balanced advantage or multi-asset funds may be more suitable as they provide a mix of equity and debt to mitigate risk.
- For long-term investments (3 years or more), equity funds could be a better option as they tend to deliver superior returns over extended periods despite short-term market swings.
2. Risk Management
- Choose funds with a low beta, lower downside capture ratio, and low standard deviation. These factors help reduce risk and make the fund more stable during market fluctuations.
- Large-cap funds may provide more stability than mid-cap and small-cap funds, as they invest in well-established companies with strong cash flows.
3. Diversification
- Opt for funds with a well-diversified portfolio across sectors and asset classes to cushion against volatility.
- Consider funds that allocate investments across domestic and international markets to benefit from different economic cycles.
4. Fund Manager’s Track Record
- Evaluate the historical performance of the fund and its consistency across different market conditions.
- A skilled fund manager with a disciplined approach can navigate market downturns more effectively and generate better risk-adjusted returns.
As markets remain unpredictable, experts advise investors to stay patient, avoid panic-driven decisions, and stick to long-term financial plans. Systematic Investment Plans (SIPs) continue to be a preferred route, as they help average out investment costs and take advantage of market corrections.
In the near term, investors will closely monitor developments around global trade policies, inflation trends, and central bank actions. Market volatility may persist, but those who adopt a well-researched, disciplined investment approach can emerge stronger when conditions improve.
