4 things to do when stock market crashes!
When stock market is crashing, panic clouds our decision making. We are unable to decide and often end up taking wrong decisions. Here are a few things we can and should do when there is too much crash.
#1 Book loss and save on capital gain tax
This is applicable if you've already booked some profit during the financial year.
All short term capital gain is taxed at 20%. Long term gain beyond 1.25 lakh is taxed at 12.5%. So if you've booked fair bit of profit earlier this year, book some losses now- that will offset your profit and save on taxes. You will loose about 1-2% in selling & buying transaction (STT, brokerage etc) but will save 12-20% in tax. Wait for price to fall a bit more and buy again when you feel right.
#2 Book loss, keep some liquidity
If you have zero emergency fund, if you have no capital to invest when market crashes further, then better to book some loss and keep the capital ready. Wait for a better opportunity
Like you bought a share at 100 ₹, now it is 60 ₹. If you feel market will fall further, sell and wait for the price to drop to 50 or 45 ₹.
Advantages: More # of shares now= higher dividend earning, more profit when price goes up. (Earlier you'd put 10000 ₹ and got 100 shares, now sold for 4000 Loss, got 60 shares. At 40₹, you will get 90 shares for 6000 ₹- more dividend and more profit if price goes back to 100₹ a share later.
#3 Do you have a plan B
If you book loss and take out all your money, what is your plan B? Where will you invest it? Gold? Crypto? Silver? Some other share? If you have a confident plan you can try this option- your money, your assessment, your risk.
There is no guarantee your new investment will give better returns- after 6 months you realize that stocks you sold have come back to their earlier price while your new investment has tanked. We never know.
If not sure, stay put in your current investment and wait for recovery.
#3 Shift from SIP to lumpsum
When market is very volatile, SIPs put you at a disadvantage. If on the day of your investment market goes up, you will get less number of units. If you can wait patiently and invest same amount on the days when market crashes, you will get more units. Read more about this concept in a separate post here
Let me know what you think.
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