Understanding Market Corrections and Investor Behaviour

A market correction is a temporary decline in market prices, while investor behaviour determines how individuals interpret and respond to that volatility.

During such periods, emotions such as fear, uncertainty and loss aversion can influence investment decisions more strongly than long-term financial reasoning.

Understanding these behavioural patterns can help investors assess market movements with greater perspective and make more considered investment choices.

Should You Panic When Your Mutual Fund NAV Falls?

The first question that may come to investors’ minds during market downtime would be What should I do when mutual funds are going down? Start by understanding why the fund has fallen rather than reacting immediately. Falling NAVs can be part of normal market-linked investing and do not, by themselves, indicate that the fund must be sold.

NAV reflects the per-unit value of the securities held by a mutual fund after accounting for liabilities. Therefore, when the value of underlying investments declines, the scheme's NAV can also fall. (SEBI)

Why Do Mutual Funds Fall? Understanding Market Corrections

Investors wondering why mutual funds go down should first look at what is happening to the assets held by the scheme.

For equity-oriented funds, prices may decline due to changes in economic expectations, corporate earnings, inflation, interest-rate conditions, geopolitical developments, or shifts in investor sentiment. Debt-oriented schemes can also experience NAV fluctuations due to changes in interest rates, credit conditions, and other economic factors.

SEBI's Riskometer framework considers factors such as the nature of underlying assets, credit risk, market volatility, and interest-rate sensitivity while indicating the potential risk level of a mutual fund scheme. (SEBI)

A market correction is a period when market prices decline after prior gains or amid changing expectations. Corrections cannot be predicted consistently, and investors should be cautious about restructuring portfolios based on guesses about where the market may move next.

What Should You Do When Mutual Funds Are Going Down?

Your response should begin with your financial plan rather than the latest NAV.

Avoid panic-selling

Selling simply because markets have fallen can turn a temporary decline in portfolio value into a realised loss. Instead, examine whether anything fundamental has changed in the scheme or your financial situation.

Continue suitable SIPs

If your goal, time horizon and chosen scheme remain appropriate, a market decline alone may not justify stopping a SIP. With a fixed SIP amount, lower NAVs generally allow an investor to purchase more units, while higher NAVs result in fewer units.

Check asset allocation

A fall can reveal whether your portfolio is more equity-heavy or volatile than you are comfortable with. Review whether your allocation across asset classes remains suitable for your objectives and risk capacity.

Avoid trying to identify the exact bottom

Market timing requires correctly deciding both when to exit and when to re-enter. A goal-based investment approach may be more practical than reacting repeatedly to short-term movements.

Avoid These Common Investor Mistakes During a Market Fall

Market declines can make short-term losses feel more significant than equivalent gains. This behavioural tendency is commonly described as loss aversion, and it can encourage emotional decisions.

Common mistakes include:

• Selling investments primarily because NAVs have recently fallen.

• Stopping SIPs without checking whether the original financial goal has changed.

• Moving repeatedly between categories based on recent performance.

• Shifting toward whichever category appears relatively stable after a decline.

• Making major portfolio changes based on daily market movements.

• Increasing investment exposure simply because the market has fallen, without considering risk capacity.

Investment decisions should remain connected to suitability rather than fear or short-term market forecasts.

When Should You Actually Review or Change Your Investment?

A market correction alone is not necessarily a reason to exit a mutual fund. However, a review may be justified when there is a material change affecting the original investment decision.

Consider reviewing the investment if:

• The fund shows prolonged underperformance relative to an appropriate benchmark and comparable category, rather than only during a broad market decline.

• There is a meaningful change in the scheme's investment strategy or portfolio characteristics.

• Your risk tolerance or financial circumstances have changed.

• Your investment horizon has become shorter.

• Your financial goal has changed or is approaching.

• The fund's current risk profile no longer matches your capacity to tolerate volatility.

SEBI's Riskometer is designed to help investors understand a mutual fund scheme's risk level and assess whether it aligns with their risk appetite. (SEBI)

How to Stay on Track During a Market Correction

A structured portfolio can reduce the temptation to make decisions based entirely on market sentiment.

• Diversify appropriately: Different asset classes and securities can behave differently across market conditions. Diversification does not remove potential risks, but it can reduce dependence on any single investment or market segment. SEBI notes diversification as an important feature of mutual fund portfolios, subject to scheme-specific rules. (SEBI)

• Follow your asset allocation: Your allocation should reflect your goals, time horizon and ability to tolerate fluctuations.

• Review periodically, not emotionally: A scheduled portfolio review allows you to evaluate performance, risk and suitability without making every market decline a trigger for action.

Quick Checklist: What to Do When Mutual Funds Are Falling

Before taking action:

• Check whether the decline is market-wide or specific to the fund.

• Revisit your financial goal and investment horizon.

• Review whether the scheme remains consistent with its stated objective.

• Check your overall asset allocation and risk exposure.

• Avoid stopping SIPs solely because markets have declined.

• Do not switch funds only because another category performed better recently.

• Review the Riskometer and relevant scheme documents.

• Seek professional advice where needed before making significant portfolio changes.

Also read: Your guide to investing in a falling market

Blog Disclaimer

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

SEBI Registration No. MF/020/94/8

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.