The stock market has been experiencing a significant downturn, declining nearly 15% since reaching an all-time high in September. As volatility persists, investors are seeking strategies to make informed investment choices and minimize risk.
 

Factors Contributing to the Market Decline

Several key factors have contributed to the downward trend in the stock market. One of the most recent triggers has been the announcement of fresh import tariffs by US President Donald Trump against Canada, Mexico, and China.Market experts note that the negative reaction is partly due to global markets turning red after Trump's announcement. Despite strong domestic institutional buying and limited selling by foreign institutional investors (FIIs), markets have struggled to regain momentum.According to Trivesh, Chief Operating Officer of Tradejini, "This decline follows global markets turning negative after Trump announced fresh import tariffs. Despite strong domestic institutional buying and limited selling by FIIs, markets have reacted negatively." Another significant area of concern is the panic selling in mid-cap and small-cap stocks. Analysts suggest that understanding who is selling these stocks—whether retail investors or mutual funds—is crucial. If retail investors or mutual funds are offloading, it may indicate profit booking or a shift in capital allocation.
 

How to Choose Stocks During a Market Correction

During market downturns, selecting the right stocks can help investors minimize losses and create long-term wealth. Experts emphasize that stock selection should be based on several key factors:

1. Management Quality – Companies with strong leadership and a proven track record tend to perform better even during volatile market conditions.
2. Order Book Visibility – Stocks of companies with strong order books and consistent revenue streams are less likely to be impacted by short-term market fluctuations.
3. Balance Sheet Strength – Companies with low debt and strong cash reserves are better positioned to navigate economic uncertainty.
4. Valuation Metrics – Even stocks with high growth potential should be evaluated based on their current valuation to ensure that they are not overpriced.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, advises, "One thing that is extremely crucial in a downtrend is management quality. Investors must also focus on factors like order book visibility, balance sheet strength, and valuations. Even if a stock has strong growth potential, the price you are paying for that growth is important."
 

Investing in Mutual Funds During Market Corrections

For investors who prefer not to invest directly in stocks, mutual funds can be a more stable option. However, careful selection of mutual funds during a market downturn is crucial.

Raghvendra Nath, Managing Director of Ladderup Wealth, emphasizes the importance of long-term wealth creation during volatile periods:

"During market downturns, it is crucial to seize opportunities for long-term wealth creation by continuing your investment plans. However, this phase demands more careful selection of mutual funds. Investors should have a clear understanding of their financial goals, current portfolio allocation, and risk tolerance before making investment decisions."

Here are some key factors to consider when selecting mutual funds during a market correction:

1. Investment Horizon –

   • For short-term investments (2-3 years), hybrid funds like balanced advantage or multi-asset funds may be suitable.
   • For long-term investments (more than 3 years), equity funds tend to offer better returns.

2. Risk Management –

   • Choose funds with a low beta (which indicates lower volatility).
   • Look for a lower downside capture ratio, which measures how much a fund loses in comparison to the broader market.
   • A low standard deviation indicates more stable performance during market fluctuations.

3. Diversification –

   • Opt for mutual funds with well-diversified portfolios across various sectors and asset classes.
   • Funds with broad exposure can offer better protection against market volatility compared to sector-specific funds.

Key Takeaways for Investors

• The stock market decline has been influenced by global economic policies, including trade tariffs imposed by the US.
• Mid-cap and small-cap stocks have seen increased selling pressure, making stock selection critical.
• Investors should prioritize strong management, solid balance sheets, and reasonable valuations when choosing stocks.
• Mutual funds remain a safer alternative for long-term investors, provided they are selected based on risk tolerance, diversification, and investment goals.
• During a correction, continuing investments strategically can help build long-term wealth, rather than making panic-driven decisions.

As market conditions continue to evolve, investors should focus on disciplined investing and avoid short-term speculation. By selecting the right stocks and mutual funds, investors can navigate volatility and position themselves for long-term financial success.

Note: This article is for informative and educational purposes only, this is not financial advice.