What Is a Market Correction?

There is no official rule, but market commentators commonly call a fall of about ten percent or more from a recent high a correction. It is measured on a broad index like the Nifty 50 or Sensex, or on an individual share. A smaller dip is usually just called volatility.

Our page on Nifty and Sensex explains these indices.

Our page on bull and bear markets explains the longer cycles.

The idea behind the name is that prices had risen too far, too fast, and are "correcting" back towards a more reasonable level compared with company profits. That is not always the reason, but the word reflects the view that corrections are part of a healthy market rather than a disaster.

• Share prices rising faster than company profits.
• Rising interest rates in India or overseas.
• Heavy selling by foreign investors.
• Weak economic data or company results.
• Global events, wars, elections or sudden shocks.

Often several of these come together. Sometimes there is no clear reason at all.

Looking back at Indian market history, corrections of ten percent or more have come along fairly regularly, often every year or two, even during long periods when the market rose overall. Investors who stay invested for many years will live through many of them.

Some corrections end within weeks; others turn into longer bear markets lasting a year or more. Nobody can reliably tell in advance which kind it will be. That uncertainty is exactly why trying to time the market is so hard.

On paper, a ten percent fall is just a number. In real life, it means seeing your portfolio value drop week after week, reading scary headlines and hearing friends talk about selling. The emotional pressure is often harder to handle than the fall itself.

Our post on why your SIP is showing a loss explains this feeling.

• Keep the SIP running. Lower prices buy more units.
• Avoid checking the portfolio every day.
• Do not sell long-term investments in panic.
• Make sure money needed soon is not in equity.

Our page on what to do with your SIP when the market falls explains this.

When prices fall and your SIP amount stays the same, you automatically buy more units. When prices recover, those extra units gain value. This is why many long-term investors quietly welcome corrections, even if they do not enjoy them.

Our page on rupee cost averaging explains how it works.

If you have surplus money that you will not need for many years, and your emergency fund is in place, a correction can be a reasonable time to add to long-term investments. Spreading it over a few months is gentler than putting it all in at once, because nobody knows where the bottom is.

Our page on lump sum versus STP explains how to add in stages.

A correction can reveal problems in your own plan: maybe you had more in equity than you could handle, or money for a near goal was in a risky fund. Use the experience to adjust your asset allocation, not to abandon investing altogether.

Our page on asset allocation explains how to set the right mix.

After a fall, the equity share of your portfolio may drop below your target. Rebalancing means moving some money from debt back into equity to restore the mix. It feels uncomfortable, but it is a disciplined way to buy lower.

Our page on portfolio rebalancing explains how.

Sometimes the overall market is fine, but one sector, like IT, banking or small companies, corrects sharply. Diversified funds spread across sectors soften these hits. Concentrated sector funds feel them fully.

Our page on sectoral and thematic funds explains this risk.

In corrections, mid and small cap shares usually fall more than large caps, and can take longer to recover. If your portfolio leans heavily towards smaller companies, expect bigger swings.

Our page on large cap versus small cap funds explains the difference.

Past corrections, including sharp ones, have eventually been followed by recoveries, though the time taken has varied a lot. Past patterns do not promise the future. But they do suggest that patience, diversification and a long time frame have served investors well.

Our post on what the 2020 crash taught SIP investors looks at one example.

During a correction, news channels, social media and messaging groups fill up with predictions of worse to come. Most of these predictions are wrong, and even the right ones are lucky guesses. Limit how often you check prices and news. Your SIP does not need you to watch it to keep working.

• Correction: about 10% or more fall from a recent high.
• Normal and frequent, even in rising markets.
• SIP investors: keep going and avoid panic selling.
• Use it to check your asset allocation.

We are distributors rather than investment advisers and we recommend no schemes. If a market fall is making you nervous, get in touch and we will talk it through.