How to navigate this market correction? | February 2025 Market Update

Summary

In this monthly market update, Dezerv's co-founder Webha Porwal discusses the recent market correction, addressing its causes and offering guidance for investors. Key factors behind the correction include high valuations, slowed economic and earnings growth, and geopolitical instability. Webha highlights that while corrections are normal, they create opportunities for long-term investors. He recommends moving from direct equity to mutual funds for better management, reassessing mid and small-cap investments, and focusing on a dynamic SIP approach. Lastly, he advises rationalizing return expectations and prioritizing asset allocation to navigate future investments effectively.

Takeaways

• 😀 Corrections are a natural part of the market cycle, occurring regularly, even every year, as part of the normal journey.
• 😀 The current market correction has been brewing for some time due to high valuations in the market, particularly in mid and small-cap stocks.
• 😀 The market correction is due to a mix of factors: geopolitical instability, slowing GDP growth in India, and underwhelming corporate earnings.
• 😀 The degree of correction varies by investment type: mutual funds have experienced lower corrections, while direct equity and PMS portfolios have seen higher declines.
• 😀 Direct equity investing in India carries a higher risk as most individual stock portfolios underperform the market. Professional fund management is more common in developed markets.
• 😀 A significant number of individual stocks in direct equity portfolios have experienced large losses, with some taking over 17 years to recover, or never fully recovering.
• 😀 Investors with direct equity portfolios should consider shifting to mutual funds for better diversification, risk management, and professional expertise.
• 😀 Small and mid-cap stocks are not always superior to large-cap stocks. Their performance depends heavily on entry valuations, and they can be more volatile during corrections.
• 😀 Dynamic SIPs, which adjust allocations based on market conditions, can help investors better navigate volatile market segments like small and mid-caps.
• 😀 Direct equity PMSs (Portfolio Management Services) often invest in high-valuation small and mid-caps, leading to risk and lower returns. Investors should consider shifting some investments to mutual funds for stability.
• 😀 For future investments, corrections provide an opportunity for higher returns, and investors should set realistic expectations, focusing on long-term growth and diversification through asset allocation.

Q & A

What are the key factors causing the current market correction?

The current market correction is due to high valuations, particularly in the mid- and small-cap segments, coupled with geopolitical instability, a slowdown in GDP growth, and weaker-than-expected corporate earnings.

Is market correction a normal occurrence?

Yes, market corrections are natural and happen regularly. Typically, there are double-digit corrections every few years, which are part of the normal market cycle.

What impact does high market valuation have on corrections?

High market valuations require strong economic growth, high earnings growth, and geopolitical stability. When these factors do not align, market corrections are more likely to occur, as has happened in the current scenario.

How do the degrees of market correction vary across different investment segments?

The degree of correction differs across various segments. Mutual funds have experienced a lower correction, direct equity PMS has seen a higher correction, and direct stock portfolios have faced the most severe losses.

Why is it difficult for individual investors to outperform the market with direct equity investments?

It is difficult because most individual investors lack the professional expertise and time needed for successful stock picking. Over 98% of individual portfolios tend to underperform the market, especially in India where direct equity investments are higher compared to developed markets.

What should investors who are heavily invested in direct equity do?

It is recommended that investors with direct equity investments move towards mutual funds, as they offer professional management and lower risk compared to stock picking.

Why do some investors believe that mid- and small-cap stocks will always outperform large-cap stocks?

This belief stems from the strong performance of mid- and small-cap stocks post-COVID, but historical data shows that large-cap stocks generally perform similarly to small- and mid-caps over the long term.

What is the importance of entry valuations when investing in mid and small-caps?

The performance of any market segment, including mid- and small-caps, heavily depends on the entry valuations. If investors buy in at high valuations, their returns are likely to disappoint, regardless of the market segment.

What is the recommended approach for investors in mid- and small-cap mutual funds?

Investors should take a dynamic approach by diversifying investments across market-cap segments based on current opportunities, rather than sticking to a fixed allocation to mid- or small-caps.

How should investors reassess their PMS allocations?

Investors should review their PMS allocations carefully and consider reallocating towards mutual funds. PMSs often invest in mid- and small-cap stocks, which carry higher risk, especially if managed by inexperienced fund managers.

What are the key takeaways for future investment strategies?

Investors should capitalize on corrections, expect more reasonable returns (13-15%), prioritize asset allocation, and consult with investment experts to build a balanced portfolio that adapts to market conditions.

Why is asset allocation emphasized in investment strategies?

Asset allocation is emphasized because it has been a proven strategy for decades, helping investors manage risk and improve the stability of their returns across different market cycles.