Market Correction 2025: Investment Strategies for a Volatile Market

The year 2024 witnessed an extraordinary bull run, but as we step into 2025, the market is undergoing a significant market correction. NIFTY (The benchmark Index) reached new heights, and the small caps and mid caps saw an unprecedented rally, with investors willing to pay high prices just to get in. A slight fear arose in June 2024 post general elections, but the market withstood the uncertainty and continued to rally. The first half of 2024 was the era of the voting machine, but in the second half, the weighing machine took over, resulting in a market correction heading into 2025.

Individual Stock owners would know that even then while the market rallied, some stocks continued to fall. That is the story of stocks. In the long run, they always reach their right price. As Benjamin Graham wisely said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Sentiments drive stock prices beyond fundamental valuations, but eventually, the true valuation emerges. So, the voting machine showed all green in mid-2024. What happened then in the second half? The weighing machine triggered. Investors started to pay only as per the true weight of the stock. A stock can fly indefinitely on sentiments. It can stretch all the imagination of valuations, driven by sentiments. However, eventually the weighing machine has to come in to decide the right valuation. This is what happened in second half. Sentiments by design are always extreme.

While we saw one extreme in 1st half of 2024, we saw another extreme in the second half. As seen in H2 2024 (July to December 2024), investors started pricing stocks based on their intrinsic value rather than speculative sentiment, reinforcing the ongoing market correction and reshaping investment strategies for 2025.

The Sentiment Trap in Investing

Investors are generally focused on the buy side, choosing businesses based on their potential. The problem is that they are also trapped by the sentiments and end up paying more than the intrinsic value. That is why when the sentiments change, suffering is higher because in the other extreme, prices tend to go lower than the intrinsic value. Most investors may not be able to withstand this trauma of wealth erosion. I have always been of the opinion that investors with limited knowledge of Business Fundamentals should stay away from picking stocks purely based on relative price or tips.

Mutual Funds vs. Individual Stock Investing

Mutual Funds have corrected equally or even worse. But, the stress of falling market is borne by the Fund Manager and investors are insulated. While, they see their Mutual Funds portfolio falling in value, they can continue to hold because they don't see the prices falling by 50-80% of underlying stocks. In this Market fall, there are stocks which have or will correct by those level of prices. Most PSU stocks which had their golden run of valuations in 2024 have now corrected by more than 50%. An Individual Investor would feel traumatic at these kind of falls and may not now whether to sell or to stay. Many choose to stay anchored to their buying price and as the joke goes, 'become long term investors'.

As for Mutual Funds, at portfolio level, they are normally aligned with their benchmarks. Most Active fund managers would do some churning and at portfolio level manage to ensure that the fall is not too high compared to their benchmark.

Large Cap vs. Mid Cap vs. Small Cap Stocks

Now, lets look at Large Cap/Mid Cap/Small cap as categories.

Large Cap Stocks: Some, like HDFC and Asian Paints, did not participate much in the bull run.
Mid and Small Cap Stocks: These soared in 2024, with the Small Cap Index reaching an all-time high. The prevailing sentiment was that the India story is unstoppable.

Everyone believed that the India story is here to stay. Now, like everything else, the mean reversion has happened and the narrative has shifted to, 'India story is over'.

What Triggered the Market Correction?

Market Correction 2025: Investment Strategies for a Volatile Market

So, what happened here and how should you deal with it? In the second half of 2024, there were some fundamental issues with Indian Macros. This resulted in poor earnings by many businesses for past couple of quarters. The poor earnings meant changing sentiments and the valuations fell down as Earnings didn't match the price being paid. So, partly the fall was triggered by declining earnings. A part of it was sentiment.

Looking at the actions taken by Govt and RBI, we can say they are staring at a possible recession in Economy. Normally, Tax cuts and Interest cuts are expansionary policies aimed at giving money in the hands of businesses and People. The expansionary policy can be inferred to suggest that we have a case of slowdown in Economy which policy makers are trying to tackle.

With these actions, we should see a revival in the Economic cycle. Will it happen immediately? May be not. The outcome of these measures will take few quarters to trickle down. But, the markets are always ahead of the economy. Like the fall which happened without any visible signs of recession. The rise will also happen before the actual recovery. the voting machine, i.e. Market will always play ahead of the true state of Economy.

The prices have corrected for most good businesses and there is always a time in the market when the price becomes too cheap to ignore. Every market has a buyer and a seller. When buyer finds a deal profitable, they buy at any fall. When a seller finds a deal profitable, they sell at any rise. Currently, we are seeing sell at rise phenomenon and the sellers are having fun. The Investors will suffer here because they do not have the ability to profit by selling. If you are an investor who bought some stocks, you cannot do much in this downward rally.

All you can do is, wait for your business to outperform and trigger change in business-specific sentiment. That is where knowledge of valuation helps when you can determine whether you paid the right price and if there is a visible growth in sight. If you are stuck with a business that is slowing down or there wont be growth in near term, the price can keep correcting due to negative sentiments. This market fall is a mix of business and macro sentiments. That why, the correction will be deep and also a longer one. There wont be a change in sentiment soon and we may see a long time correction even after the prices have fallen already.

Investment Strategy in a Falling Market

What should you do?

1. For Mutual Fund Investors

If you are a Mutual Fund investor, you should continue to bump up the SIP this year because you are getting good valuation for your units. You would be able to accumulate more units this year compared to last year. When the market turns, you will reap the benefit because you bought it cheap. Do not try to time the market or wait for the tide to turn because nobody knows. Historically, such falls have led to time correction of at least a year. You will have a long time to continue to add at cheap valuation. A disciplined SIP approach ensures that investors take advantage of market correction to buy at attractive valuations.

2. For Direct Stock Investors

If you a direct stock picker, you should re-assess the business fundamentals and see if you paid the right price and whether your stocks can de-value further. If there is a lot of value erosion and you do not see recovery in business soon, you may have to take a hard call of booking the loss in a particular stock. Since, we are approaching end of financial year, you can console yourself by calling it a 'Tax harvesting' Opportunity to offset the profits booked in 2024.

That being said, for an investor time is the best asset. If you can avoid doing nothing which means you are not in need of money, just do nothing!! An investor who slept entire 2008 wouldn't even know what happened!!

If time is not on your side, i.e. you put your emergency funds in Equities or you went overboard looking at growth in 2023-2024, you should learn from this. Its the job of a Financial Advisor to guide you on Asset Allocation. It is important to understand your risk profile and take a call according to your situation. A Personal Finance Advisor can help you assess and act accordingly.

Final Thoughts on Market Correction

The current market correction presents an opportunity for disciplined investors. Whether through SIPs in mutual funds or selective stock picking, those who remain rational and long-term focused will benefit when the market cycle reverses. Patience and strategy are key to navigating such downturns successfully.

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