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This article tells long term equity investors how to react at the time of a major market-wide correction.
I usually don’t write about short term market movements. And I don’t offer buy or sell calls – not for individual stocks, and not for the market as a whole.
But right now, we have a special situation. And so, I have to make an exception.
Indian markets (and in fact, the markets in most countries) have corrected by nearly 20%, with many stocks having corrected by more than 50%. Most people are wondering – What should I do after such a massive fall? Should I sell whatever I have, so that I can salvage whatever I can? Or should I buy more? What if the market goes down even more?
Here is what I feel you should do. But before we move on, the standard disclaimer from me: As usual, my opinion and analysis is only for long term investors.
My only advice for short term “investors” in shares: Please invest in stocks, don’t trade. (Please read “Stocks – The winning bet for the long term” for more on this)
Don’t panic! This is not the first correction in the history of markets, and it won’t be the last. Market keeps going up and down in the short term due to various factors. As a long term investor, you need not worry about it.
You have chosen companies which are leaders and have been performing well (in the markets they operate in, not the stock market!) – This correction doesn’t change that fact!
Remember, the fundamentals of the Indian economy and Indian companies have not changed. The correction is due to factors that are totally external. Yes, our economy and our companies can’t remain totally insulated, but the actual effect would be rather small, and doesn’t warrant such a deep correction.
Stock prices of many companies had risen very fast in the past couple of months, and were not justified based on their fundamentals. Some day, the prices of these companies had to come down. The market has got an excuse, and the correction has happened!
But along with these companies, the stocks of good companies have also suffered – that’s because at times of panic, the market forgets to distinguish between companies. So, if you think for a moment, it just means that good companies are available at a deep discount!
This brings us to the next point.
Invest! Don’t get overboard, and don’t invest everything you have. But this is a great time to start putting your money in the market. As I mentioned before, this correction just means that many great companies are available at a deep discount!
Do you panic when a store declares a sale? Of course not! Then why panic now? Don’t you buy things when they are on sale? Use your common sense, and buy good companies that are available at a discount.
Yes, there is always a possibility that the market would correct further. That’s why don’t invest all your cash in one go. Start investing now, and keep investing periodically till valuations remain this attractive, or become even more attractive!
And as I have said before, as a long term investor, do not worry if the markets go down further – a good company remains a good company irrespective of its stock price!
My advise, as always, is to buy units of good, diversified equity mutual funds. (Please see “Direct investment in Stocks versus Mutual Funds (MFs)?” for more details) This is especially true in turbulent times like this.
But in case you want to invest in individual stocks, please go in only for large cap, blue-chip companies that are good for the long term.
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Raagvam,
Lets me start off with word “Wonderful Job”. Its nice of you addressing and sharing your Views and Knowledge.
I would like to invest 35k for saving Tax. Hudco 5 years term deposit is giving 9.25 % interest, Compounded quarterly. Could you please tell me is this a good option?
Do i need to pay income tax even after paying TDS?
The interest Generated might be 15 k in years. Should i declare this while filling my Tax returns after 5 years?
Is there a better product where in i can depost 35k and avail exemption under 80 c
Thanks
Vijay
Hi Rose,
If you are seeking safety, you can invest in tax saving bank FDs or PPF.
If you are ok with some risk, you can invest in a good Equity Linked Savings Scheme (ELSS).
Please check my above answer and do have a look at the articles on PPF and ELSS to know more about them.
Hi Vijay,
Thanks a lot – I am glad that I am being of help.
I am sorry but I do not have enough information on the HUDCO bonds – I could not find much about them on their website.
However, let me try to answer your questions.
HUDCO – being a government undertaking – is a very safe investment avenue. The interest rate offered is also quite attractive at 9.25% pa as mentioned by you.
Thus, you can invest in these bonds if you are seeking a safe investment avenue. Please do compare th rate offered by these bonds with the interest rate offered by tax saving FDs of various banks, though.
TDS
You can say that TDS is kind of a precautionary tax. What happens is this – you include the interest earned in the income for that year, and calculate your income tax liability of that year.
Then, you claim credit for taxes already paid – this would include TDS by your employer on your salary, TDS by banks of FDs, and TDS by HUDCO on these bonds. After this, if you still have any unpaid tax, you pay it to the income tax department.
Thus, you might need to pay tax even after TDS depending on your other incomes and other taxes paid by you.
In general, if you fall in the highest tax bracket, you would need to pay tax even after the TDS.
Other options
If you are seeking safe investment options, this HUDCO bond or bank FDs are the best bet.
another good option is PPF, but has a long lock-in period. (Please read “Public Provident Fund (PPF) – Plan Your Retirement and Save Tax” for more)
If you don’t mind taking some risk, Equity Linked Savings Scheme (ELSS) is another good option. (Please read “ELSS is not for someone else” for more)
SIR i had saved 20000 in ppf , 10000 in lic and 12000 as pf for2008-09
I can save around 10000 in the remaining 2 months
please suggest me other better options to save tax .
