The Scale of the Problem in India

India’s retail investor base has exploded over the past five years. From around 4 crore demat accounts in 2020, we crossed 17 crore accounts by early 2026, according to SEBI data. That is a remarkable democratisation of investing. But it has also brought tens of millions of first-time investors who have never experienced a severe bear market.

During the COVID-19 crash of March 2020, the Sensex fell nearly 40% in a matter of weeks. AMFI data showed that equity mutual fund redemptions surged to a 14-month high in that period. Similarly, during the October–November 2022 global sell-off triggered by aggressive US Fed rate hikes, retail investors pulled thousands of crores out of direct equity and mutual funds right before the markets bounced back sharply.

The irony is brutal. The people who sell during crashes often lock in their losses at the worst possible time and then buy back higher when confidence returns — the exact opposite of good investing.

The Psychology Behind Panic Selling

Panic selling is not a character flaw. It is a deeply wired human response. Understanding the psychology behind it is the first step to overcoming it.

1. Loss Aversion — We Fear Losses Twice as Much as We Enjoy Gains

Nobel Prize-winning economists Daniel Kahneman and Amos Tversky found through their Prospect Theory research that the psychological pain of losing ₹10,000 is roughly twice as powerful as the joy of gaining ₹10,000. This is hardwired into us. So when a portfolio drops ₹1 lakh on paper, the emotional response is disproportionately intense — and selling feels like the “safe” thing to do.

2. Recency Bias — We Think the Recent Past Is the Future

If the market has been falling for three weeks straight, our brain starts to believe it will fall forever. This is called recency bias. It is why investors who bought SIPs in 2019 stayed calm during small dips but lost their nerve in March 2020 when every news channel was broadcasting apocalyptic headlines. The brain confuses a temporary event with a permanent new reality.

3. Social Contagion — Fear Spreads Faster Than Data

India has over 50 crore WhatsApp users. During a market crash, stock market groups, family chats, and office conversations get flooded with panic messages, scary charts, and predictions of further doom. This social pressure creates a feedback loop that drives more selling. People who would have held on individually end up selling because “everyone is saying the market will fall more.”

“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffett

4. Overconfidence Followed by Capitulation

Many Indian retail investors entered the market between 2020 and 2021 when easy gains were common. Rising markets created overconfidence — a sense that investing is easy and profits are guaranteed. When reality bites in the form of a sharp correction, the same investors swing to the other extreme and capitulate entirely. The emotional whiplash is extreme.

India-Specific Factors That Make It Worse

Beyond universal psychological biases, there are a few factors that make Indian investors particularly susceptible to panic selling.

The Role of Fixed Deposits in Our DNA

For decades, Indian households were raised on the philosophy of capital safety above all else. Fixed Deposits, PPF, and gold were the cornerstones of household wealth. The idea that an investment can fall 30% in value — even temporarily — is culturally jarring. Many investors have not mentally accepted volatility as the price of equity returns.

Leverage and Intraday Trading by Retail Investors

A significant chunk of India’s retail activity comes from F&O (Futures & Options) trading, where leverage is high. SEBI’s own studies have shown that over 90% of individual F&O traders lose money. When leveraged positions go wrong during a crash, forced liquidation triggers further selling, which worsens the crash in a self-fulfilling cycle.

Short-Term Money in Long-Term Instruments

One of the most common mistakes is investing money you’ll need in 1–2 years into equity mutual funds or stocks — instruments meant for a 5–10 year horizon. When that money is needed, or when a crash makes it look like it won’t recover in time, the only option seems to be selling. It’s not just psychology — sometimes it’s genuine financial misplanning.

What Happens to Those Who Stay?

History is an incredibly reassuring teacher — if you’re willing to study it. Let’s look at some of the worst market crashes in India and what happened to investors who simply held on.

The pattern repeats itself again and again. Markets fall sharply, panic sets in, retail investors sell — and then markets recover, often faster than anyone expected.

Proven Strategies to Avoid Panic Selling

Knowing why you panic sell is only half the battle. Here is what actually works to prevent it.

1. Know Your Asset Allocation Before a Crash

If you are losing sleep over a 15% portfolio dip, you are probably taking on more equity risk than your temperament can handle. The time to figure out the right equity-to-debt ratio is not during a crash — it’s before one. A well-structured allocation means you will always have a stable portion of your portfolio to rely on while equities recover.

2. Automate Your SIPs and Don’t Check Daily

Systematic Investment Plans (SIPs) are one of the best tools available to Indian investors. They force you to keep buying during dips — which is exactly the right thing to do. The problem is that most people pause or stop their SIPs during crashes out of fear, which defeats the entire purpose of rupee-cost averaging.

3. Have a Written Investment Policy Statement

This sounds formal, but it is deeply effective. Write down why you invested, what your goals are, how long your horizon is, and what level of drawdown you are prepared to tolerate. When panic strikes, re-reading this document can be the anchor that stops you from making a costly mistake.

• Define your investment horizon clearly (minimum 5–7 years for equity)
• Set an asset allocation you can live with during a 30–40% crash
• Automate SIPs so emotions don’t interfere with monthly investing
• Avoid checking portfolio value more than once a month
• Limit financial news consumption during high-volatility periods
• Keep 3–6 months of expenses in a liquid fund or savings account

4. Think in Units, Not Rupees

During a fall, instead of focusing on the rupee value lost, focus on the number of units or shares you own. A crash doesn’t reduce the number of units you hold — it just temporarily marks them at a lower price. In fact, if you continue your SIP, you’re accumulating more units at cheaper prices. This reframe can be genuinely powerful during periods of stress.

5. Understand the Difference Between Volatility and Permanent Loss

Volatility means the price moves up and down. Permanent loss of capital happens when a company goes bankrupt or commits fraud. Diversified equity mutual funds or index funds almost never result in permanent loss — they recover. Understanding this distinction is what separates calm, rational investors from those who sell at the worst time.

The SIP Investor’s Superpower During Crashes

If you have an active SIP, a crash is not a disaster — it is a sale. Consider this: if you invest ₹10,000 per month into a Nifty 50 index fund through SIP, a 20% correction means you’re buying the same basket of India’s top 50 companies at a 20% discount. Over time, this dramatically reduces your average cost and boosts long-term returns.

This is the concept of rupee-cost averaging, and it is one of the most powerful features of disciplined SIP investing. But it only works if you stay invested. The moment you stop or redeem in panic, you break the cycle and crystallise your losses.

Final Thoughts: The Market Doesn’t Reward the Smartest — It Rewards the Calmest

India is on the cusp of becoming one of the world’s largest equity markets. The stories of wealth creation through patient investing are all around us — from the early Infosys shareholders to the disciplined Nifty SIP investors of the 2000s. The common thread is not timing the market. It is staying in it.

The next crash will come. It always does. Some of it will be driven by global factors beyond anyone’s control. What is within your control is how you respond. Will you be the investor who hits “redeem” in a panic at 9:15 AM? Or will you be the one who tops up their SIP and waits for the tide to turn?

The market has a long history of rewarding the second kind of investor. And now, so do you.