A Falling Market Is Your Best Chance to Fix a Broken Portfolio
- Abraham Cherian
- Apr 3
- 6 min read
Updated: Apr 16
Most investors panic when the market falls. They refresh their portfolio apps, feel a knot in their stomach, and do one of two things — sell everything in fear, or freeze and do nothing.
Both are wrong.
A market downturn is, in fact, the most underrated opportunity in personal finance. Not just to buy more — but to fix what was never built right in the first place. If your portfolio has accumulated over years through a bank relationship manager, a distributor's recommendations, or your own trial and error, there is a very good chance it has problems you have never had the time or urgency to address.
Now is that time.
Why a Down Market Changes the Math in Your Favour
When your investments are sitting on large gains, any restructuring comes with a tax bill. But when the market has corrected — and many of your schemes are in the red or have eroded gains — the cost of cleaning up your portfolio drops dramatically.
This is the financial equivalent of renovating a house during the off-season, when contractors are available and costs are lower.
The current environment gives you a rare combination: lower capital gains, smaller tax liability, and an opportunity to redeploy into a cleaner, better-structured portfolio — all at the same time.
The 5 Moves That Actually Fix a Portfolio
1. Shift from Regular to Direct Mutual Funds — with Minimal Tax Pain
If you invested through a bank, a distributor, or an app that routes transactions through intermediaries, you are almost certainly holding regular plan mutual funds. These are structurally more expensive than direct plans, simply because a portion of your returns is paid as commission to the distributor — every single year.
The difference in expense ratio between regular and direct plans is typically 0.5% to 1.5% per year. That may sound small, but over 20–30 years, it can cost you lakhs — sometimes crores. For example, a ₹25,000 monthly SIP over 30 years in a regular plan (1.5% expense ratio) accumulates to approximately ₹6.3 crore; the same SIP in a direct plan (1% expense ratio) grows to ₹7.8 crore — a difference of ₹1.5 crore.
The correction window makes the switch cheaper. When your regular fund holdings are in the red or near breakeven, redeeming them generates little or no taxable gains. You can also strategically offset gains from profitable schemes against losses from underperforming ones, reducing your overall tax bill.
Tax note: Long-term capital gains (LTCG) on equity mutual funds held over 12 months are taxed at 12.5% on gains exceeding ₹1.25 lakh per financial year. Short-term gains (held under 12 months) are taxed at 20%. Plan your redemptions across financial years to use the ₹1.25 lakh annual LTCG exemption efficiently.
Once you redeem, rebuild your portfolio in direct plans — ideally with a clear financial plan, not a random collection of schemes. You can invest directly through AMC websites or platforms like MF Central or MF Utilities.
2. Audit Your Risk Exposure — Right Now
Equity is a wonderful long-term wealth creator. But if more than 70–80% of your portfolio is in equity and you have never done a formal risk assessment, you may be carrying more risk than you can emotionally or financially handle.
A proper risk assessment considers three things:
Your investment horizon — how many years before you need the money
Your income stability — whether a job loss or income dip would force you to redeem
Your emotional threshold — can you genuinely hold through a 30–40% drawdown without panic-selling?
If the current correction has you anxious, that is important data. It means your portfolio's risk level is higher than your actual risk appetite.
Use this moment to restructure — not by exiting equity entirely, but by finding the right equity-debt balance for your situation. A common starting point: subtract your age from 100 to get your approximate equity allocation (e.g., a 45-year-old might consider a 55–60% equity allocation), though personal circumstances should always override rules of thumb.
3. Exit Unplanned Stock Holdings and Build a Proper Portfolio
Many investors accumulate individual stocks over the years — tips from friends, IPOs, sector bets, or company shares from employment. Over time, this creates a cluttered, unmanaged collection of 20–30 stocks with no coherent strategy.
When these stocks are in the red, the rational move is to accept the loss, exit, and consolidate into a well-structured direct mutual fund portfolio. Diversified equity mutual funds give you professional management, automatic rebalancing of the underlying holdings, regulatory oversight, and better risk-adjusted returns over the long run — without requiring you to track individual company results every quarter.
Holding on to loss-making stocks out of hope ("it will recover") is an emotional trap called the sunk cost fallacy — the loss is already real whether you sell or not. What matters is where your capital works best going forward.
4. Exit Consistently Underperforming Mutual Fund Schemes
Not all mutual fund schemes are equal. If a scheme has consistently underperformed its benchmark and category peers over 3–5 years, it is not a temporary blip — it is a structural problem with the fund's management or strategy.
How to identify underperformers:
Compare the fund's returns against its benchmark index (e.g., Nifty 50, Nifty Midcap 150)
Check its category rank — is it consistently in the bottom half?
Review whether the fund manager has changed recently
Tools like ValueResearch and PrimeInvestor provide category-level performance comparisons and fund ratings that make this analysis straightforward.
A market downturn often sees underperforming funds fall more than their peers. If a scheme cannot hold up relatively well even in its category during a correction, that is a red flag worth acting on.
5. Rebalance to Your Target Asset Allocation
Asset allocation is the single most important determinant of long-term portfolio outcomes — more than fund selection or market timing.
If you set a target of, say, 60% equity and 40% debt, but equity's strong run in prior years pushed it to 75%, your portfolio is now riskier than you planned. The market correction may have brought it closer to 60% again — which actually means no action is needed and you have been partially "auto-rebalanced."
However, if your allocation is still skewed, or if you have never set a target allocation at all, this is the moment to do it. Practical rebalancing approaches:
Threshold-based: Rebalance when any asset class drifts more than 5% from its target.
SIP-based: Redirect new contributions toward the underweight asset class — the most tax-efficient method.
Annual review: Once a year works well for most investors.
Two Often - Overlooked Moves During a Downturn
Tax-Loss Harvesting
If schemes are in the red, you can redeem them to book the loss and immediately reinvest in a similar (not identical) fund. The booked loss can be set off against capital gains from other investments in the same financial year, reducing your tax liability. Short-term capital losses can be set off against both short-term and long-term gains; long-term losses can only offset long-term gains.
Review Your Emergency Fund and Liquidity Buffer
Many investors who panic-sell in a falling market do so not out of strategy but because they don't have liquid reserves. Before restructuring, ensure you have 6–12 months of expenses in a liquid fund or savings account — untouched, separate from your investment portfolio. This financial cushion is what allows you to stay invested through a correction instead of being forced out at the worst time.
Who This Is Most Relevant For
Investor Type | Key Problem | Priority Action |
Bank / distributor client | Regular plans, high expense ratios | Switch to direct plans, offset gains with losses |
DIY investor with random stocks | No strategy, individual stock risk | Consolidate into diversified MF portfolio |
Long-term SIP investor, no review | Equity-heavy, never rebalanced | Risk assessment + rebalancing |
Inherited or gifted portfolio | Unknown schemes, no alignment to goals | Full portfolio audit, exit laggards |
A bad market does not create problems — it reveals them. The real risk was always in the misaligned portfolio, the expensive regular funds, the unplanned stock collection, or the equity exposure you never consciously chose.
The correction gives you a time-limited window to act at lower cost. Use it to move from a portfolio that happened to you, to one you actually designed.
The best time to clean house is when the market gives you a discount on the exit door. That time is now.
Disclaimer: This content is for informational purposes only and does not constitute financial or tax advice. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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