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Four mistakes to avoid in a market crash

business Updated: Oct 01, 2011 02:19 IST
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Volatile markets can unsettle a retail investor. If you are already invested in equities, you may be tempted to redeem or if you were planning to invest, the volatility may have scared you off. Here are four mistakes you should avoid in case there is a sudden fall in the market.

Mistake 1
Don’t panic and sell equity or mutual fund units or stop your systematic investment plans: On a day when you see that a number of indices across the globe have corrected at least 3%, it’s only natural that panic sets in and you assume the worst. Undeniably, the global economic growth is slowing. But there is another side to the story.

“The current situation is worse than 2008, as it involves sovereign issues across countries,” said Vinod Sharma, head, private broking and wealth management, HDFC Securities. “So there is uncertainty in the markets. Investors should prepare for the long term.”

Mistake 2
Don’t block all your money in fixed tenor products such as fixed deposits and bonds: Investing in those should not be at the cost of your overall asset allocation.

You can have some money allocated to fixed-income products, but it is also useful to have liquidity to take advantage of equity market corrections. Don’t shy away from equity. Markets overreact on news and turnaround sooner or later but you need to have discipline and liquidity to take advantage of corrections.

Mistake 3
Don’t make hasty purchases: When markets correct by large amounts, stock prices start looking very attractive. In the S&P Nifty, 31 stocks have corrected more than 10.0% in the same period. This doesn’t mean you should rush to buy the stock that has corrected the most, hoping that the subsequent rise in price will be maximum too.

Usually, such corrections weed out the bad from the universe, which simply means that when markets recover, it is the quality stocks or companies that gain the most and sooner than others.

Mistake 4
Avoid seeking too much information on flash events. Usually, such events are followed by a barrage of expert opinions and may confuse you.

As long as you are sure of the bigger picture and the long-term growth story remains in place, keep investing. Disciplined asset allocation and investing via systematic transfer plans and SIPs can help tide over short-term volatility.

(Lisa Pallavi Barbora, Mint)