When interest rates rise, money tends to move from equities to debt. In India, the introduction of a 10 per cent long term capital gains (LTCG) tax on equities has affected sentiment. With consumer inflation hitting a 17-month high in December, there is a concern that the Reserve Bank of India (RBI) may undertake a rate hike soon. An overarching reason for the fall, however, is valuations had soared higher than long-term averages in the Indian markets (see table), and a correction was long overdue.
The first piece of advice experts have for new investors is not to panic. "Equities are a volatile asset class. Do not panic and exit after the markets have fallen. If you do so, you will not be there to ride the recovery. Stick to your long-term investment horizon," says Gupta.
Financial planners, too, have similar advice. "The biggest mistake would be to stop your systematic investment plans (SIPs) or pull out the money invested in equity markets just because the markets are in correction mode," says Mumbai-based financial planner Arnav Pandya. He adds if the correction goes on for a few days, investors should not dump equities as an asset class, and imagine they will be better off in debt. If your goals are long term, say, five or seven years, stick to your asset allocation. In these market conditions, inaction is your best ally. "Just sit back and watch until your investments, which may go into the red, return into positive territory," adds Pandya.
Experiencing volatility will also enable new investors to get true measure of their risk appetite. In rising markets, most investors overestimate their capacity to handle volatility. A falling market offers an opportunity to get a more accurate assessment. "Invest according to your risk appetite. Not everyone should be 100 per cent in equities. Mutual funds have a wide range of products, which offer 30, 50, or 70 per cent equity exposure. Begin with the level of exposure that is right for you and raise it gradually," says Gupta.
If you are worried about the impact of the LTCG tax, remember it will only lower your return by 10 per cent. "Over the long term, equities will continue to be more attractive than other asset classes," says Nikhil Banerjee, co-founder, Mintwalk. Pandya says the next time investors review their portfolio, they must invest more to make up for the shortfall that may arise due to this tax. With corporate earnings beginning to revive, the issue of overvaluation in the markets may also be addressed.
Some investors may try to profit from this fall by investing more. They should avoid trying to time the market for short-term gains. "If you have any surplus money, invest it systematically over a period of time and for the long haul," says Banerjee.