Falling markets not just offer attractive buying opportunities. They are actually one of the best times to identify and remove poor stocks or mutual funds from a portfolio and reinvest into better ones at attractive prices. But the key is to distinguish between temporary fall vs fundamentally bad investment.
Most investors do the opposite – they sell good assets in panic and hold bad ones hoping they recover.
In a falling market:
- Weak businesses fall more
- Volatile funds fall more than benchmark and peers
- Poor fund managers get exposed
- Portfolio overlaps and style issues become visible
So, corrections act like a stress test for the portfolio.
The best strategy during market correction is to review the portfolio and exit underperforming or unsuitable investments – essentially to weed out the “bad apples” that may not deserve a place in your long-term portfolio.
The suitable approach should be:
- Identify investments with short-term losses.
- Check whether these losses can be used to offset current or future capital gains.
- Exit fundamentally weak or unsuitable investments.
- Reinvest the amount into better, more suitable investments aligned with your long-term goals.
As per taxation rules, the short term capital loss can be offset against both short term and long term capital gains. Long term loss can be set off only against long term capital gains. If any capital gains are not booked during the year, the losses booked can be carried forward for next 8 financial years under both the old & new tax regimes.
Most importantly, this exercise is not primarily for saving taxes, but about improving portfolio quality as part of the broader investment strategy. Tax harvesting is an incidental activity here.
Remember, corrections are not just for buying, they are also for cleaning & restructuring portfolios.