Stock market crashes can be frightening. For most investors, watching their portfolio lose value in a matter of weeks or days can induce panic. But history reveals that market crashes are not the end but a temporary phase in an otherwise longterm journey. The trick is to understand, prepare for, and react intelligently to them.
Why do crashes occur?
Indian market crash
examples from history
Typical investor
reactions
And most importantly: What should you do as an investor?
A market crash is a precipitous, sudden drop in stock prices in a large portion of the market—frequently 20% or more in a brief duration. Crashes result from panic selling, bad news, economic crises, or international shocks.
In contrast to normal corrections (510% drops), crashes are rapid, deep, and tend to be emotional.
Why Do Market Crashes Occur?
Market crashes typically occur as a result of a mix of:
Economic slowdown or
recession
Geopolitical tensions
or war
Pandemics or natural
disasters
Corporate frauds or
scams
Global financial
contagion
Overvaluation or speculative bubbles burst
Indian Market Crashes in History
Let's examine some actual Indian market crash scenarios and what caused them:
1. Harshad Mehta Scam – 1992
Crash cause: Harshad
Mehta rigged stock prices by forging bank receipts.
Effect: Sensex crashed
from 4500 to 2500 levels.
Lesson: Always ask for sudden, unexplained rallies, particularly by few stocks.
2. DotCom Bubble – 2000
Crash trigger:
Internet company overhype, primarily in the US, but Indian IT stocks were
impacted too.
Impact: Several
technology stocks such as Infosys and Wipro made steep corrections.
Lesson: Steer clear of herd mentality and unsustainable valuations.
3. Global Financial Crisis – 2008
Crash trigger: Lehman
Brothers collapse owing to US subprime mortgage crisis.
Impact: Sensex
plunged from 21,000 to 8,000 (~60% decline).
Recovery: Recovery
took 2 years.
Lesson: Indian markets can be significantly affected by events from around the world.
4. COVID19 Crash – March 2020
Crash trigger: Global
lockdown, economic collapse fear.
Impact: Nifty
plummeted almost 38% in one month.
Recovery: Steep V shape
recovery; Nifty hit all time highs by Nov 2020.
Lesson: Crashes tend to offer best buying opportunities.
5. Adani Group Rout – Jan 2023
Crash trigger:
Hindenburg Research report accused Adani Group of manipulation.
Impact: Adani shares
plunged 50–70%, pulling down Nifty.
Lesson: Cringe at overleveraged and overvalued conglomerates.
Common Investor Reactions During Crashes
1. Panic Selling
Investors sell in panic, usually at a loss, locking in the damage.
2. Freezing
Remaining inactive out of confusion or fear, missing re entry points.
3. Overtrading
Attempting to salvage losses by aggressive buying/selling, resulting in additional errors.
4. Chasing False Hope
Investing in 'cheap' shares without analyzing fundamentals.
What Should Investors Do During a Market Crash?
✅ 1. Stay Calm, Don't Panic
Market crashes are a part of the cycle. Panic creates poor judgment calls. Instead, think about your investment goals and time horizon.
If longterm goals (5+ years), shortterm crashes won't concern you.
✅ 2. Don't Check Portfolio Daily
Your portfolio will be red during crashes. Constant monitoring heightens anxiety and leads you to emotional decisions.
Discipline > Emotions
✅ 3. Don't Attempt to Time the Bottom
Catching the bottom precisely is not possible, even for experts.
Instead:
Invest using SIP
(Systematic Investment Plans) to keep investing
Invest using STP (Systematic Transfer Plan) to phase money into equities
Example:
During the COVID crash in Mar 2020, those who invested lump sum on 23rd Mar (bottom) were lucky—but those who continued to invest through SIPs from Feb–Jun also earned good returns in the long run.
✅ 4. Stick to Quality Stocks and Funds
In crashes, weak businesses can fold completely. Prioritize:
Largecap stocks: HDFC
Bank, Infosys, Reliance, TCS
Blue chip mutual funds
Low debt, high margin companies
Example:
During 2008 crash, Satyam Computers folded because of a scam, but Infosys rebounded and touched new highs in a few years.
✅ 5. Buy Gradually When Market Falls
If you have spare cash, utilize dips to add more, but in tranches:
Divide your capital
into 3–4 tranches.
Invest every 5–10% fall.
Example:
In march 2020, if you invested ₹20,000 whenever Nifty fell 5%, you'd have bought at a wonderful average price.
✅ 6. Rebalance Your Portfolio
If equity is too small a proportion in your portfolio because of a crash:
Transfer some money
from debt to equity
This enhances longterm returns
Example:
If your equity fell to 35% from 50%—buy equity to restore it to balance.
✅ 7. Don't Stop SIPs
In the 2020 crash, most halted SIPs out of fear—missing the Vshaped recovery.
SIPs are best when markets are low.
You purchase more units for the same price. This lowers average cost and increases longterm returns.
✅ 8. Use Crash to Review, Not React
A crash is an excellent time to:
Reverify your asset
allocation
Close poor quality
assets
Get back to longterm planning
Don't:
Leaping into crypto or riskier smallcaps because they're "inexpensive"
Crash and Recovery – COVID 2020 Case Study
Let's see some data:
| Date | Nifty 50 Level | Event |
| Jan 2020 |
12,300 | PreCOVID high |
| March 23, 2020 | 7,511 | COVID crash bottom (38% fall) |
| Nov 2020 |
13,000+ | Fully recovered (within
8 months) |
| Dec 2021 | 17,000+ | Hit new alltime highs
Investors who:
Remained invested:
Recovered and profited
Invested through
crash: Had tremendous returns
Panic sold out: Lost money or missed the rebound
Tools to Monitor Market Sentiment
Use these indicators during crashes:
India VIX: High VIX =
fear = possible bottoming
PutCall Ratio (PCR):
Extremely low PCR indicates panic
FII/DII Data: See if
institutions are buying
MACD/RSI Indicators: Technical oversold zones
Key Principles to Follow
1. Have an Emergency Fund (6 months expenses)
So you don’t sell investments during panic.
2. Stick to Asset Allocation
Don’t go 100% equity or debt. Balance is key.
3. Invest with a Purpose, Not for the Sake of Returns
Associate investments with purposes such as retirement, house, e tc.
4. Practice Long Term Thinking
Each and every crash has always been succeeded by a recovery.
Last Words
Crashs in the market are frightening, but they are also chances for well-disciplined investors. History has consistently demonstrated again and again:
"Be greedy when others are fearful, and fearful when others are greedy." – Warren Buffett
If you:
Stay calm,
Invest in quality
assets,
Continue SIPs,
And use dips smartly…
…you’ll not only survive the crash—you’ll come out wealthier on the other side.
Remember: A crash is just a storm. The sky clears
eventually.
Let your strategy—not your emotions—drive your decisions.
