Nifty, Sensex crash: What can you do to avoid mistakes during market corrections?

Domestic indices have been undergoing a free fall for the past few sessions consecutively. The Indian equity market saw another day of losses, with the Nifty index logging its longest losing streak on record, falling for the tenth consecutive session. The Nifty ended down by 37 points, closing at 22,083, while the Sensex slipped by 96 points to settle at 72,990. 

Mutual fund investments can be impacted by market corrections, sometimes resulting in costly errors. Investors, even the most seasoned ones, may find their patience tested during market meltdowns, as evidenced by rising SIP cancellation rates. In times of market turmoil, it is crucial for mutual fund investors to consider how to navigate their portfolios effectively. What strategies should be employed to weather such conditions?

Experts feel that despite the rapid growth of the mutual fund industry, investors must navigate market corrections wisely. As of January 2025, India's mutual fund AUM reached Rs 68.04 lakh crores, with equity funds at Rs 29.46 lakh crores and SIP inflows at Rs 26,400 crore. Avoid panic selling, reliance on past performance, and over-diversification. Consider risk tolerance and SIPs for stability.

The mutual fund industry in India has been expanding rapidly, driven by increased digital inclusion, even as the equity markets have been subject to corrections in recent months. 

As of January 31, 2025, the industry boasted an Assets Under Management (AUM) of Rs 68.04 lakh crores, with the equity mutual fund sector accounting for Rs 29.46 lakh crores. Systematic Investment Plan (SIP) inflows were notably robust at Rs 26,400 crore in January 2025. Despite this growth, market corrections have led to a shift in sentiment, with many investors redeeming their equity mutual funds, reflecting the challenges faced during volatile market phases. 

Market corrections often provoke a reactionary approach among investors, leading them to redeem their funds during panic peaks. This tendency can be detrimental to long-term investment returns. 

Historically, such corrections have highlighted common mistakes, such as selling investments when panic is at its height, which can lead to unnecessary financial losses. Investors are advised against choosing mutual funds solely based on past performance, as this does not guarantee future success. Instead, a fund's consistency, long-term management experience, and investment process should be considered for a more informed decision-making process.

Expense ratios are another crucial factor that investors frequently overlook. The long-term impact of these costs on returns can be significant. To mitigate expenses, investors should consider low-cost index funds or direct plans. Finding the right balance in portfolio diversification is also critical; over-diversification can dilute returns, while under-diversification can increase risk. A balanced portfolio, aligned with one's risk tolerance, financial capacity, and investment objectives, can provide stability and potential for growth.

Establishing risk tolerance is essential to avoid investments that are either too conservative or excessively risky. Investors should assess their risk profile and financial goals to ensure their investments are well-aligned. Market timing, often perceived as an attractive strategy, is generally unreliable and can lead to missed opportunities. 

Instead, investors are encouraged to utilise systematic investment plans (SIPs) as these provide a structured approach to investing, potentially leading to higher returns while mitigating risk. SIPs allow for regular, disciplined investments that can buffer against market volatility.

By avoiding these common investment pitfalls, Indian investors can achieve greater success with their mutual fund investments. Ensuring that investment strategies are aligned with individual risk profiles and market conditions is crucial. 

As the mutual fund industry continues to evolve, adapting to changing market dynamics and maintaining a strategic approach will be key to realising long-term financial growth. Investors should remain informed and prudent, focusing on long-term objectives rather than short-term market fluctuations.

Market correction

Nithin Kamath, co-founder and CEO of Zerodha, extended a message to potential new investors who may be experiencing unease due to significant corrections in the Indian stock markets. In a post on X platform, Kamath addressed concerns about the decline in active systematic investment plan (SIP) accounts in direct plan mutual fund (MF) schemes. He cautioned individuals who are considering entering the market post-COVID-19 that following the current trend may not be advisable.

"For investors who started investing after the pandemic, this is the first real market correction.  Markets are cyclical, and given the way our markets went up from late 2020, this fall was inevitable," he wrote. 

Kamath strongly advised not to stop SIPs during market fluctuations, as they help to spread out investments across various market cycles. It is noteworthy that the number of active SIP accounts in direct plan mutual fund schemes saw a decrease of almost one million in January. 

The co-founder of Zerodha emphasized that in 2020, stocks in different categories experienced significant drops of 25-40%, followed by a remarkable increase of 200-400%. Kamath pointed out that those who reacted impulsively during the downturn would have missed out on the subsequent recovery. 

He suggested that the key to long-term success lies in consistently investing in the right funds in a diversified manner. Additionally, Kamath cautions against borrowing money to invest, as leveraging market volatility can be risky.