While the fall has been led by sell-off by the foreign portfolio investors (FPIs) over the last five months, experts say that investors should continue with their asset allocation and take it as an opportunity to invest in high quality stocks available at good valuations and should stay away from low quality and richly valued companies in the mid and small cap segment.

FPIs and the fall: Have we seen it before ?

While the fall on Friday may not have been the biggest single day fall in the history of Sensex, and not even the biggest single day fall over the last six months — as it had fallen 1,769 points or 2.1 per cent just five months back on October 3, 2024 — it came as a rude shock for millions of new investors in India in whose investment history and memory, this is could only be the first or second long slump period of five months or more.

Many of the young investors (not by age but by the years they have been equity investors) may not remember but not too long ago, i.e., in 2021, after it closed at a high of 61,765 in October 2021, the Sensex went on a 9-month long slump period and fell by over 16.8 per cent to hit 51,360 in June 2022, before it started it rally back and regain the October 2021 levels over the next five months in Nov 2022.

While the foreign portfolio investors emerged as net sellers in each of the months between October 2021 and June 2022, resulting in net outflows of Rs 2.55 lakh crore amid concerns of high inflation and interest rate hike by the US Federal Reserve, they have already sold a net of Rs 2.12 lakh crore over the last five months between October 2024 and Feb 2025 over concerns of high valuation, slowdown in growth and impact of tariff threats by US President Donald Trump.

If the markets fell by over 16.8 per cent then, they are already down by, and have taken the markets down, by 14.7 per cent per cent over the last five months.

What to expect?

The FPIs have already pulled out a net of Rs 2.12 lakh crore from Indian equities over the last five months. What this has done is that it has pulled the Indian indices down to more reasonable valuations. Experts say that while the NIFTY 50 is now below its historical average, the mid and small caps are still trading above their historical average and so some more outflow may continue.

“Often, markets are driven by flows rather than fundamentals. When they go up, they go above the fair value — and when they come down, they fall below the fair value. With the fall over the last 5-6 months, the Nifty has now come below its historical average. Even small- and mid-cap stocks, though still above their historical average, are coming closer to the average. As long as foreign portfolio investors (FPIs) are selling, the markets will continue to fall. They will stop once the selling stops,” said Nilesh Shah, MD, Kotak Mahindra AMC.

There are some who say that while Nifty may trade around the current levels now and may not see a big fall from here, the pressure may continue on companies in the mid- and small-cap segment as they still are in an expensive zone.

What should you do?

Fund managers who have spent two to three decades in the market say that investors should never get swayed by movements on either side.
While it is advisable to seek guidance from a professional financial planner during these times, investors need to be patient with their equity investments as the minimum investment tenure for equities should be between 3-5 years.

Even as the portfolios have witnessed correction, the losses are only notional till they are booked so experts say that selling should be avoided in the current markets.

On the other hand they say that since high quality stocks and large cap schemes have seen a correction in their prices and net asset values respectively, it would make sense to invest in a staggered manner since the markets will rise again once the foreign portfolio investors’ outflows stops.

While asset allocation holds key and investors should avoid getting overweight on mid- and small-caps as they chase momentum stocks, experts say that retail investors should always put a portion of their equity money in multi-asset funds, which typically acts as a private banker for a retail investor and splits the investment into various asset classes. A look at some of the multi-asset allocation funds shows that while the Sensex over the last six months fell over 11 per cent, the three best performing schemes in the multi-asset fund category fell between 2.8 per cent and 7.3 per cent.

It is also important to note that at a time when the equities have been falling on account of various concerns, gold has been on a rise and has risen 9 per cent in the last four months.