Widely read:
What led to this massive swing in the market?
First and foremost, the exit poll was extremely positive. The market anticipated another five years of a business-friendly government, valuing stability and predictability. Over the last decade, the government implemented significant measures like GST, reduced tax rates, market democratisation, digital transactions, and the Jan Dhan bank accounts, which had far-reaching impacts. The exit poll fueled optimism, but the actual results were a shock, leading to a dramatic market decline—the biggest single-day fall in years. A similar situation occurred in 2004, with an even more severe market reaction.
Can this happen again?
Yes, such events can recur. Over the past decade, major decisions have often been made quietly and efficiently. However, the coalition government can now hopefully act with greater understanding and maturity.
Investors need to be more cautious. They have to understand how things work and how to behave because, most of the time, it is not the government or the market but your behaviour that will make your losses permanent, help you hold your appreciation, or tide over such a crisis.
What is the word of advice for investors?
New investors might panic, especially if they've only been in the market for a year. Following basic investment rules, like SIPs and long-term commitments, is crucial. Ignore market noise, stay calm, and continue your plan. Additionally, instead of chasing recent performance, focus on diversification. Avoid small-cap funds or sectoral/thematic funds initially. Instead, start with multi-cap, flexi-cap, value, or tax-saving funds to gain broad market exposure.
Should new investors have invested when the market tanked on June 4?
It might be very tempting, but if you're on a plan, stay the course and don't get tempted to exit or enter the market. As a new investor, solidifying your principles and rules is very important. It's like forming a good habit, and that is why you should not get tempted by such noise.
For those who have started SIPs in the last two to three years and are currently in profit, it's important to stay calm and avoid drastic actions. This is also a reminder for those invested in exotic-strategy funds to adhere to the same, fundamental investment principles of diversification, keeping calm and keeping it simple.
For investors who have been in the market for a long time and have a sizable amount invested, asset allocation becomes crucial. Deciding how much of your money to allocate to fixed income versus equity is essential. This decision is uniquely yours; no external advisor can prescribe the perfect allocation for you.
Once you establish your asset allocation, it's crucial to stick to it and rebalance periodically. This strategy allows you to have funds available to invest during market downturns, moving money from fixed income to equity as needed. Remember, the market will always experience volatility. By maintaining a well-thought-out asset allocation, you can take advantage of market opportunities without losing sleep over short-term fluctuations. Additionally, having a portion of your money in fixed income ensures that some of your investments are sheltered from market turmoil, providing a buffer during turbulent times.
Caution for futures and options (F&O)
June 4 should be a wake-up call for every investor who is investing in the stock market and doing F&O trades. It was the day when many investors faced significant losses due to stocks hitting the lower circuit.
Leveraged trades, where an initial investment of Rs 1,000 can control a Rs 10,000 position, pose significant risks. If the Rs 10,000 position drops to Rs 9,000, the Rs 1,000 investment is wiped out entirely.
Many investors overlook the potential for total loss when engaging in leveraged trades, focusing instead on the potential gains.
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