Possible Reasons and Things to Keep in Mind during Market Fall
On Monday 20th December 2021, the Indian Stock Market witnessed a significant freefall and bloodbath across the indices. The major benchmark indices Nifty 50 and Sensex were down by 2.19% or 372 points and by 2.09% or 1,190 points respectively. In this situation, many investors get impulsive and take unnecessary steps which could act as a big setback to their wealth creation journey. Hence, in this article, we will be covering various factors which need to be kept in mind in the situation where the market is falling. Also, we would highlight the important factors behind this fall in the stock market.
Reasons behind fall in Stock Market:
i) Fear of Omicron Variant:
- The rising Covid-19 cases of Omicron variant and the possibility of high cases, illness, and death rates have greatly affected the stock market.
- The Europe Countries have already started taking preventive measures to fight with Omicron Variant by imposing lockdowns and travel restrictions. For instance, the Netherlands has imposed a lockdown in the middle of the festive season which will last till mid-January 2022. Also, the UK has imposed travel restrictions.
- India is also reporting a steady rise in the Omicron cases and has crossed the mark of 100 cases in just a few days, which is doubling at a very faster rate as compared to Delta Variant which was responsible for the second wave of Covid-19 in the country.
ii) Rising Interest Rates:
- Finally, after a significant pandemic-led stimulus and quantitative easing, now the central banks have initiated raising the interest rates to cope-up with the inflationary pressure in the country.
- And, here Bank of England has taken this first move by hiking interest rates from 0.1% to 0.25%, raising yield by 0.15%.
- Moreover, the US Federal Reserve has also started aggravating the process of Quantitative Easing Tapering. It is also expected that Federal Reserve could hike the interest rate by 3 times.
- Generally, there are 2 asset classes where Institutional investors park their money i.e., Equity and Debt. The debt asset class mostly comprises Government Securities. And hence in the coming period, this 10-Year U.S. G-Sec could develop and give challenge to Equity Asset Class. Currently, the rate of 10-Year US G-Sec is hovering around 1.4%-1.5%, and the same could cross the mark of 2%.
iii) FIIs Selling Off:
- In the last 40 days, Foreign Institutional Investors (FIIs) have net sold of around Rs. 80,000 Cr., while specifically in December 2021 itself, they have made a sale of around Rs. 26,000 Cr. in the market, which is the highest monthly selling in 2021.
Things to keep in mind in Falling Market:
1) Never Stop SIPs:
During a falling market, the investors are allotted more units in the mutual fund due to a fall in the Net Asset Value (NAV) of funds, and hence one should not stop SIPs and continue to invest. Here, an aggressive approach can be also taken, if the investor feels comfortable. Further, this period only skyrockets your CAGR returns over the longer horizon,
2) Following Asset Allocation:
Generally, Asset Allocation should be followed by the investor, when his/her portfolio size has become really large.
3) Rebalancing of Asset Allocation:
The rebalancing of asset allocation usually should be done on a half-year basis or once-in-a-year basis, but in case if the market goes up or down by more than 10%, or when the desired return from the particular asset is achieved, then also the asset allocation rebalancing should be done.
4) Spending Time on Reading Books:
This is one of the factors one should follow when the market is in a freefall. When the market is falling, investors should go through the investment books especially from experienced authors like Warren Buffett, Charlie Munger, Benjamin Graham, and many others.
5) Time to be an Investor:
The falling market is the point of time where investors turn into traders or vice-versa. And hence, one should try to control his/her behavior during this situation and should try to remain as a long-term investor and should avoid any kind of doing experiments with the market.
Preview of Q3FY22:
With the reduction in the Covid-19 cases, speed-up of the vaccination pace in the country, and on account of the festive session, it is expected that the businesses are expected to report a significant quarter for the third quarter of FY22.
What Should Shareholders Do?
At this point in time, Long-term Investors are strictly advised to stick to their financial planning approach and should not take any impulsive calls like stopping SIPs, or exiting markets, etc. And most importantly, this kind of situation best reflects the risk profile of the investor and also presents an opportunity to assess it very well. An Investor should follow a disciplined manner of investment and should avoid any lumpsum investment in the current situation. The best investment method would be to follow a staggered manner of investment.