Seek these money-making opportunities when the market mood is grim

If you have good profits, book some. If the market falls more, redeploy the cash

After a rally that lasted for over a year, the Bombay Stock Exchange Sensitive Index, or Sensex, has gone into correction mode finally. Between January 29 and February 6, the Sensex is down 5.8 per cent. But market experts have been expecting this and preparing investors for this correction for quite some time.
 
Says S Naren, chief investment officer, ICICI Prudential Mutual Fund: “We were in the midst of a global bull market wherein some global indices have been overbought as of January. One has to take cognizance of the fact that US markets have gone up continuously from 2009 to 2018. So, the correction seen in Indian equity space is largely owing to the correction in global markets.”
 
The good news: For quite some time, market experts have been warning investors about high valuations. After this correction, valuations have started slipping. The Sensex price-to-earnings ratio (trailing twelve months) stood at 26.4 on January 18. After the recent crash, it has come down to 24.1. The 10-year average price-to-earnings ratio is 19.  However, the bad news is that most experts feel that the correction is not yet over and valuations are still high. “From a valuation perspective, markets continue to remain expensive with small-and mid-cap extremely overvalued. In terms of earnings, we believe the growth will take place over the next 18 months,” added Naren.
 

Investors should remember that the going won’t be smooth for some time. “While I maintain that the longer-term fundamentals for India remain intact, the journey for Indian equities is unlikely to be a smooth one. There will be periods of euphoria, driven by renewed hopes of a brighter future, interspersed with periods of gloom based on recurrent doubts over sustained growth revival,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.  According to him, there is  no reason to panic currently. What is important is that if this correction continues, there would be good opportunities to enter the market, especially for those who missed this rally. But don’t be too aggressive in buying or selling.
 
If you have good profits, book some: If you are someone who has been in the market for the past couple of years, there is a good chance that you are sitting on good profits. Despite the recent correction, the Sensex is still up 19.78 per cent in the past one year. Similarly, the category average returns of large-cap equity funds is 18.80 per cent in the past year. For investors in mid- and small-cap funds, the category average returns are higher at 21.08 per cent and 28.89 per cent. “If your asset allocation has gone wrong due to higher returns in equities and falling interest rates, this is a good time to rebalance it before there is further damage,” says an investment expert. Agrees Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors: “Despite the recent fall, many investors would still be over-allocated to mid- and small-cap funds because of the strong run up in this segment. They should sell and rebalance there.”
 
Don't try to time the markets: When markets fall, many investors engage in panic selling because they are unable to bear the pain of watching their investments go into the red. At this point, they tell themselves that they will re-enter when the markets move up again. Such market timing is extremely hard to pull off even for professional fund managers because turnarounds tend to be sudden. Hence, stay put with your notional losses and wait for the markets to recover. If your goals are a long way away, there is no need to panic and exit.
 
Continue with your systematic investment plans (SIPs): SIPs enable you to make market declines work to your advantage. As prices decline, you get to buy more units of your schemes, which boosts their long-term returns. If the markets continue to fall, there is even a possibility that you could become under allocated to equities. “In that scenario, you could even invest more in equities rather than pull out,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India.
 
Foray into international funds: Most Indian investors tend to ignore international funds, especially when returns from their home market are high. But international diversification has the potential to reduce portfolio volatility. Currently, when the rout in equities is global, you may think that not much is to be gained by diversifying globally. Nonetheless, experts suggest that you should do so. “You won't always have a situation where the foreign and domestic markets move in the opposite directions. But it is possible that the foreign market may correct less than the home market, in which case the overall correction in your portfolio will be lower,” says Dhawan.
 
The benefits of international diversification also become apparent over a longer time horizon.  Begin with a 10 per cent allocation to international funds. Start off by investing in the US market, the world's largest equity market. Many of the companies listed in the US are multinationals that get their revenues from across the globe.
 
Diversify by investment style: This is another way you can bolster your portfolio. “Value funds, and dividend yield funds (a subset of value funds) may not do too well in bullish markets, but they tend to offer better downside protection in falling markets,”says Belapurkar.
 
Stick to quality: Direct investors too should avoid panicking and stay the course. “Long-term investors, who are not leveraged and are invested in quality companies, have nothing to worry about. If you found something attractive at Rs 100, there is no reason to find it unattractive at Rs 80," says Jatin Khemani, founder and chief executive officer, Stalwart Advisors, a Sebi-registered independent equity research firm. On the other hand, investors who bought on tips or blindly chased momentum stocks without understanding the quality and prospects of the business should re-consider their positions and see whether it makes sense to exit.