Nifty posts 2nd biggest one-day fall in 8 months: What should you do now?

The stock market posted its biggest single-day decline in at least 8 months, as various global and domestic factors weighed on investor sentiment. The Sensex closed 2.01% lower at 55,822 while the Nifty 50 index shed over 371 points down to end the session at 16,614.20. All the major indices ended the session lower.

How steep is the fall?

Reasons for today's fall

We have compiled the reasons that led to major sell-off across all sectors today. They are as below:

Omicron fear - European countries and the United States have started reporting a surge in Covid-19 cases once again and Omicron variant being the primary contributor. Some European countries have started imposing nationwide lockdown. Reports suggest the lockdown could spill over through Christmas and New Year. The fear of increasing cases in India and lockdown getting imposed again is one of the primary reasons for today's fall.

FPI pulling out funds - Foreign portfolio investors (FPIs) have continuously been pulling out funds from the Indian equity market. In December alone, FPIs withdrew Rs 25,252 crore from stock markets. Also, year-end FPI selling is in play. They are booking profits to show higher returns and profits for the current year.

US Fed Taper - The US Federal Reserve has indicated in its meeting last week's meeting that it will start the tapering process, and the interest rates are likely to be increased to tackle rising inflation. The Fed indicated the process could start as early as March next year. Even the Bank of England increased the policy rate on Friday last week. If the US Fed hike rates, it is expected FPI will continue to withdraw money. The fear of FPI pulling significant money from the Indian market was another reason for the fall today.

High valuations: Two months back, 18 October, NIFTY touched an all-time high of ~18475. Investors had seen one of the best rallies - NIFTY was making new highs every day. Since then, many global brokerages had cautioned that the Indian stock markets are trading at very high valuations. The brokerages had downgraded Indian stocks to ‘Neutral’ citing unfavourable risk-reward given high valuations, as a number of positives appear to be priced in, while headwinds are emerging. “Even on two-year forward price-to earnings (PE) basis (incorporating India’s strong earnings outlook), India is trading at record high elevated premium relative to regional markets,” Nomura had said in a note. 

What should you do now?

• Invest in equities in a staggered manner. 
• Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the ongoing volatility 
• INDmoney’s ROBO STP can help you invest in these volatile markets
• Invest only high-quality AAA-rated bonds as they have the least risk.
• There is a significant tax advantage in holding a debt fund for more than 3 years. 
• For a more than 3-year investment horizon, an investor should prefer short duration (duration < 3) fixed income instruments over a long duration. Stick to short duration funds and bonds, as yields are expected to remain volatile in the near future. Further, in the medium-term (2-3 years) the rate cycle is expected to bottom out and move up.
• Avoid lump sum allocation and adopt a more staggered approach over the next few months.