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Two weeks after two major events—Donald Trump winning the US presidential election and demonetisation in India—the course of domestic equity markets has altered drastically. Benchmark large-cap indices have corrected about 6.5%, while mid- and small-cap indices have corrected around 10-12%.

Looking deeper into market segments, some sector indices have corrected as much as 20% in these two weeks and many have corrected at least 10%. Should you jump in and buy, given that valuations are looking much cheaper? Also, should you buy across the board? Here are some mistakes to avoid in this sharp correction.

It’s difficult to ascertain exactly how much both these events contributed to the correction. But a look at the emerging-markets’ equity performance shows that other emerging markets are also correcting.

The MSCI Emerging Market Index has fallen 5% since 8 November, pointing to the realisation that fall in stock prices isn’t driven by just one factor. At a broader sector and industry level, however, demonetisation has a varied impact. It’s significant for some segments and not so impactful for others. If one were to go by equity reaction, certain sector indices are faring worse than others (see table). For example, real estate stocks have corrected heavily, as earnings for these companies are expected to be badly hurt.

At the same time, we know that the lack of currency is a temporary phenomenon. So, should one buy more real estate stocks just because the correction has been harsh and swift?

Shyam Sekhar, chief ideator and founder, iThought, said: “One should avoid buying in sectors where policy is going to be disruptive. What worked till now, may require a rethink and may not work going forward. Real estate sector dynamics will get altered with regulatory changes getting put in place next year. Now, added to that is the side effect of taking cash out of the system."

A visible impact of the currency withdrawal is an interim slowdown in consumption. This impacts many segments, especially consumer goods. The financial sector will be impacted as interest rates are already falling and inflation could be lower as well. “You have to consider the reason behind a sharp correction, rather than blindly buying a stock that has seen a dramatic fall. Use prudence, and research the prospects going forward," said Kartik Jhaveri, founder and director, Transcend Consulting.

Even within sectors that are likely to gain from demonetisation, one has to be cautious. Select stocks where there is fundamental strength in the balance sheet and other financials. Some stocks will correct more, as the negative impact on their earnings is higher.

Don’t add new funds

For mutual fund investors waiting to deploy surplus money, it may be tempting to pick the scheme that is at the top of the performance charts now. Secondly, given that mid- and small-cap funds have corrected more, should you exit those and enter other categories?

Equity mutual funds are meant for long-term investments, and are to be held for 5 years or more. There is little reason to redeem your existing funds unless you are close to your goals.

Moreover, when selecting schemes to invest in now, stick to those that you already hold rather than adding new ones. Gajendra Kothari, managing director and chief executive officer, Etica Wealth Management Pvt. Ltd, said: “For the last 2 years, we have relied on systematic transfer plans to invest: as markets fall, you buy more. There may be even more correction from here on. Buy at lower levels, but there is no need to add new funds and over-diversify. Stick to one or two funds in the categories that you identify." Jhaveri said, don’t get greedy and put too much money immediately. It’s best to have a staggered approach and invest over time.

Do your homework before buying stocks that have fallen significantly. As the economic dynamics change, there could be a fresh earnings impact, which needs to be assessed. Neither should you switch your allocation in a hurry. Keep long-term goals in view.

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