10 things small investors must do when the market drops 10%

Most investors tend to panic the moment there is a correction in prices. Here are 10 things that investors must do when there is a 10 per cent correction

Most investors tend to panic the moment there is a correction in prices. For example, in the last few months, small investors who are invested in mid-cap stocks may have been in for a nasty surprise. Even as the Nifty was flat to positive overall, the mid-cap stocks were down by nearly 15-20 per cent on an average. In fact, in specific cases, the stocks were down by 40-50 per cent. Since small investors are typically invested in mid cap and small cap stocks, this would have been really difficult for these investors. The question is what should these investors do in such cases?

10 things investors must do when there is a 10 per cent correction…

1. Is this a micro correction or a macro correction? For example, if you are holding on to a stock and that stock has problems as in the case of PC Jewellers or Manpasand, the option is quite clear. You need to get out of such stocks even if it entails a loss. But if the problem is at a market level as it happened when the Additional Special Margins (ASM) was imposed, then you need to adopt a slightly different strategy.

2. Always use a stop loss, even if you are an investor. This is more relevant for the small investor who is normally invested in mid and small cap stocks. For example, if you are willing to take a risk of up to 10 per cent or 15 per cent on the stock, then keep that as your cut off point. At that point, just exit the stock and take a fresh view later on.

3. Is the sector looking vulnerable? The more consumer-driven sectors like FMCG and Auto have not been overly impacted. But banks have been a lot more vulnerable to the correction. Take a view based on whether the specific sector is vulnerable or not.

4. Is there a story to be cautious about? For example, high leverage companies are a strict “No” in these markets. Secondly, this market is going to reward efficiency so focus more on companies with above industry average OPMs. PSU banking as a sector is better avoided since the extent of bad loans is still not too clear, nor is the way the banks are going to be recapitalized in the coming months. Metals could be a worry if the global trade war translates into a fall in industrial demand. These are story-specific factors to consider. 

5. Where are the positive triggers coming from? There have been a lot of triggers for consumption in the last couple of years. The GST has helped make a lot of items of mass consumption cheaper. The government has given a big boost to urban consumption via liberal payouts in the last Finance Commission, especially to retirees and the armed forces. Rural consumption has also got a big boost. Always keep your focus in these times on such sectors with positive triggers.

6. Check for sectors that are holding value despite the carnage in the markets. There is a bigger story and try to focus on that. Two sectors viz. Automobiles and FMCG have hardly corrected compared to the Nifty as can be seen from the relative price charts. That is where the strength is, and not without reason. Always bet on strength in this kind of markets and remodel your holdings accordingly. 

7. Focus on quality stocks at attractive prices. Mid-caps have already seen corrections in the past and you will find that the quality mid-cap stocks with robust business models and steady cash flows are showing strength in weak markets. It makes a case for selective mid-caps with strong growth and robust margins.

8. Restructure your portfolio aggressive. Don’t worry about losses on the losers. Rejoice in the fact that you are getting quality stocks at attractive prices. If there was that large-cap stock available 20 per cent lower and you always wanted to buy, just go ahead and buy it. This is the time to rehash your portfolio completely.

9. Park your funds temporarily in other assets if you are not too sure. It is OK to miss 5 per cent of the bounce as long as you are going to eventually buy with a lot more conviction. Try to limit yourself only to high conviction stories. But be open to the idea of parking your money in assets like bonds, liquids or even gold funds for a short period of time until there is clarity in the markets.

10. If you are still confused adopt a systematic approach to putting money into equity funds instead of direct equities. These fund managers will give you the benefit of professional management and the systematic approach will give you the benefit of rupee cost averaging.

When your stocks correct 10 per cent, don’t start panicking. This is the time to ask some hard questions and tweak your strategy accordingly.

The article has been sourced from Angel Broking. Views expressed are their own