The Indian stock market saw a steep decline after the Russia and Ukraine war in Feb, 2022. There was a sharp rise in the international crude oil price, and India imports a significant portion of its energy needs. Additionally, foreign institutional investors have been exiting the Indian stock market in noticeable numbers since October 2021. Stock market investors all over the world are investing in US government bonds, which may lead to a further crash in the Indian stock market. With the recession looming large on the Indian economy, a crucial question for every Indian investor is if he should invest in the stock market during a recession.
Why Recession is a Good Time to Invest in the Stock Market
As a common practice, stock prices generally fall during times of recession. When the stock market is at a low, an investor can get shares of fundamentally strong companies, having strong financials and good corporate governance, at lower prices. You can open an online Demat account and invest in the stock market at such a time.
When the stock prices are low, an investor can pick stocks of companies that enjoy an economic moat and get high returns in the long run. Companies with an economic advantage enjoy a competitive advantage over their competitors, which gives long-term profit to investors.
An investor who chooses to invest in stocks of strong companies during a recession can expect his wealth to grow when the share prices bounce back in the future. Moreover, the stock market crashes before an economy goes into recession, so investors can invest in these stocks even before the recession.
Some investors follow a strategy of investing in the stock market when the market bottoms out. However, it is not a reasonable approach because it is not easy to foresee a stock market bottom. Its best to break your investments in different chunks and invest at intervals.
Investment Strategies For a Falling Market
You can enjoy the benefits from your Demat account during times of recession if you follow these strategies.
- An investor can invest in diversified equity mutual funds instead of investing in stocks because these mutual funds invest in stocks from various sectors and industries, giving the advantage of diversification.
- An investor may invest in diversified equity mutual funds in the form of a SIP (Systematic Investment Plan). With the help of a SIP, an investor buys more units of a stock when the prices are low, and fewer units of the stock when the prices are high. It averages out the purchase price of the equity mutual funds over a span of time.
- A market-savvy investor with a high-risk appetite can invest directly in stocks that are promising.
- When the market is bearish, an investor can invest in defensive stocks, like pharmaceuticals and FMCG, as these stocks perform well even during a recession.
- During a recession, an investor should avoid stocks of companies that have huge debts in their financial statements. Even though their stock prices fall tremendously during a market low, avoid investing in such stocks because there is no assurance of when they would bounce back.
What Experts Recommend While Investing During a Recession
- Build a strong emergency fund before investing in the market during a recession. Your emergency fund should be enough to support you financially for at least three to six months.
- Investing during the recession is a long-term call. Do not invest during such times if you plan to exit the stock market anytime soon. Investing during a low is a long-term strategy and be prepared to leave your stocks untouched for up to seven years at least when you invest during such times.
Invest during a recession only if you have patience and will not check your portfolio every day and stress over it. There may be a lot of stock market movement during such times, and getting impatient over your investment will only cause you stress.
