The benchmark indices are down over 12 per cent from September highs. The prolonged phase of correction has unnerved investors and may compel some to take rash decisions. What should investors do?

“Direct investors who have bought shares early in the price rise cycle and are in the money can book profits. Investors should avoid fresh purchases given the upcoming Budget and RBI policy,” said Sunil Subramaniam, former managing director of an asset management company.

While foreign portfolio investors may continue to sell, domestic institutional investors are unlikely to turn major buyers before the Budget, he said. A lot will depend on if interest rates are slashed and how much money the Budget puts in the hands of people to boost consumption.

‘Stay invested’

Analyst Deepak Jasani believes that investors with a view of 5, 7 or 10 years should stay invested as they may not be able to time their exit and re-entry. Those with a shorter horizon of 6-18 months can take some profits and raise cash as the outlook for the first half of the year is not that great.

Investors have been chasing thematic and even new-age stocks without any concern for valuations, according to experts.

“Valuations of largecaps have become reasonable but given that earnings turnaround is not yet visible, there is still scope for downside. Midcap valuations, on the other hand, still appear stretched despite the recent correction as earnings have disappointed,” said Jasani.

G Chokkalingam, Founder and MD of market research firm Equinomics Research, feels that investors can look at the PEG ratio and if the companies’ profit growth has been able to keep pace with the price to earnings multiples. If PE is 100, for example, but year-on-year profit growth is not even 30 per cent, they may sell.

“Sit tight if there is valuation comfort; one can even explore the option of SIPs in stocks directly. Focus on quality mid- and small-cap companies with significant domestic businesses and a potential for growth or value unlocking,” he said.

New investors should avoid direct investing and take exposure through mutual fund SIPs as they can benefit from rupee cost averaging. Existing MF investors can continue their SIPs.

According to Subramaniam, large and flexi-cap funds are better bets for new investors as large-caps offer better value relative to small and midcaps.

Besides the Budget and RBI policy action, market direction will be dictated by Wednesday’s Federal Reserve rate decision and accompanying policy guidance. Mixed earnings reports and geopolitical tensions may also keep markets on edge.