How to make the most of this market correction

Markets going through a correction phase

Vikas Agarwal, ET Bureau



The equity markets, globally, are going through a correction phase at the moment. The financial crisis in the Euro region is the main reason behind this sharp correction in the global stock markets. Some of the Euro zone countries have mounted a high sovereign debt. These countries are finding it difficult to repay the loan and can't take independent monetary policy actions due to their partnerships in the common currency - the Euro.

On the other hand, the domestic markets have also corrected by almost 10 percent over the last few weeks, even though there are no fundamental issues with the domestic economy or business houses. This indicates the domestic markets have a sound foundation and they will be among the first markets globally to recover from this downtrend.

Investments in equity more attractive

Therefore, investments in equity in the domestic markets have become more attractive at the lower levels. Usually, when one talks of investments in equity or equity-based instruments, many still think of it like a bet. In fact, equity-based instruments should be part of every investor's investment portfolio. However, the percentage of allocation towards equity and debtbased instruments should depend on the risk profile of the investor.

Although debt instruments are considered relatively safe options, there is a hierarchy of risk even among debt instruments. An investor has to look at the trade-off between risk, return and liquidity while taking an investment decision. Since the markets have corrected significantly, investors can look at a slightly higher allocation towards equity-based instruments.

Here's how you can change your portfolio composition:

Fresh investments in equity

One simple method is fresh investments in equitybased investment instruments. For example, you can make investments in stocks or mutual funds. Investors with a low risk profile can look at subscribing to some of the IPOs of public sector companies which are expected to be launched in the next few months.

The government is disinvesting in several public sector companies to raise funds to partially fund the fiscal deficit. These stocks are usually considered safe investment options as these companies have a solid business model and the backing of the government. And on the other hand, you get the flavour of investing in equity as well.

Shift some debt to equity

You can also look at diverting some short-term debt investments to equity-based mutual funds. However, since the market conditions are a bit uncertain at the moment, you should assume a medium to long-term horizon for your investments in equity-based instruments. However, it is important for investors to invest only their risk capital in equitybased instruments at this point in time.

You can also look at converting your debt-based mutual funds to equitybased funds. Since the interest rates are expected to go up, the existing debt instruments will lose some of their face value. Since the equity markets are going through a correction phase, it is a good idea to convert a part of your debt-based investments to equity-based investments.




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