What Works Better in a Crisis – Equities or Cash?

When markets become turbulent, many investors face a familiar dilemma: should they stick with equities or shift into cash for safety? Over the years, many downturns have unfolded – for instance, the 2008 Global Financial Crisis, the 2013 Taper Tantrum and the 2020 COVID-19 crash, and investors have wrestled with this question time and again. 

Market downturns often stem from a mix of global events, local policy changes and shifts in economic data. As soon as fears mount, some people sell their shares at the lows, locking in losses, while others cling to stocks without the funds to buy more at low prices. History shows that panic selling usually causes more harm than good, yet staying invested can feel risky when numbers are plunging. At the same time, holding cash is not without its costs, as inflation erodes your purchasing power over time. 

By looking at how investors behaved, what happened to stock prices and the role cash played during past crises, you can learn to stay calm and act at the right moments. This enables you to turn market upheavals into an opportunity to strengthen your portfolio. This article explains how equities and cash perform during crises and suggests strategies to navigate volatile markets.

Understanding Market Crises and Investor Behavior

Market crises often result from a confluence of global and domestic factors. In India, tumults have stemmed from international events like the 2008 Lehman Brothers collapse or the 2013 U.S. Federal Reserve’s announcement of tapering bond purchases. However, local triggers like regulatory changes, political uncertainty, or sharp shifts in economic indicators can also lead to downturns. During these episodes, equity markets decline swiftly, liquidity dries up and investors become risk‐averse.

Behavioural economics teaches us that loss aversion exerts a powerful pull. When portfolios plunge, the pain of unrealised losses overshadows logical analysis. Therefore, many investors engage in panic selling, offloading equities at low prices to stem further losses. In March 2009, for example, the Nifty 50 had fallen by more than 60% from its January 2008 highs. Retail investors and foreign portfolio investors (FPIs) both exited in droves: FPIs withdrew over thousands of crores during that period, while retail participants shifted money into fixed deposits and liquid mutual funds. Such mass flight to safety underscores how emotion trumps fundamentals in a crisis.

However, some investors do not succumb to panic. Domestic institutions such as pension funds, insurance companies and high‐net‐worth individuals often have long‐term mandates and well‐defined trading plans. As a result, they may act as buyers when others are selling, taking advantage of lower prices in a downturn. By sticking to their strategy instead of reacting to every headline, these investors can secure better entry points. In contrast, those who sell based on fearful news often lock in losses and miss the market’s subsequent recovery.

Performance of Equities During a Crisis

In crisis conditions, equity trading can appear daunting. Indices collapse, and bluechips tend to post multi-digit losses. But history reveals that downturns often give way to robust recoveries. Consider the Global Financial Crisis for instance. By March 2009, many frontline stocks like HDFC Bank, Infosys and Reliance Industries traded at valuations that were never seen in the preceding years. Investors who held on then witnessed dramatic rebounds; by January 2010, the Nifty had almost retraced to pre‐crash levels, and by 2021, early 2008 investors would have seen over a 160% gain – and that is excluding dividend payouts.

During the Taper Tantrum of 2013, the Nifty briefly corrected by nearly 10%, the rupee depreciated from ₹55 to ₹68 against the U.S. dollar, and FPIs withdrew funds at a rapid clip. However, domestic retail investors remained reasonably steady, channelling funds into short‐term debt and equity‐oriented mutual fund schemes. Within six months, the Indian equity market had recouped most of its losses, underscoring the cyclical nature of corrections in emerging markets.

The COVID‐19 crash in March 2020 illustrated volatility in microcosm. The Nifty 50 plunged nearly 40% in a matter of weeks, while FPIs recorded historically high outflows. Yet retail systematic investment plans (SIPs) continued unabated, reflecting growing investor maturity. Within six months, the Nifty had recovered roughly 90% of its losses, driven in part by aggressive fiscal and monetary stimulus. Those who remained invested, even during the darkest days, reaped substantial benefits as valuations soared from February lows.

While equities can appear stressful during a crisis, markets have historically favoured those who maintain conviction. Quality companies with strong balance sheets tend to rebound faster, offering attractive entry points when fear peaks. Moreover, disciplined equity trading, guided by valuation discipline and strong risk management can mitigate downside while preserving the potential for outsized gains when markets normalise.

Role of Cash in a Crisis

Cash does not yield immediate returns. In fact, inflation tends to erode purchasing power. But its strategic value becomes much clearer in a downturn. Data from past crises consistently demonstrates a surge in cash holdings and liquid‐fund allocations when markets fall. 

During 2008–09, for instance, mutual fund cash allocations and bank deposit inflows climbed sharply as investors sought shelter from volatility. Similarly, in the 2013 Taper Tantrum, capital gravitated toward short‐term debt funds and other near‐cash instruments, underscoring a strong preference for liquidity over potential equity gains.

The concept of optionality explains why cash can be far from passive. Option value lies in the ability to deploy capital swiftly when markets offer steep discounts. In March 2020, frontline stocks changed hands at valuations seldom seen since the global financial meltdown. Investors who maintained significant cash reserves could purchase these blue‐chip companies at bargain prices, reaping substantial rewards as markets rebounded. Likewise, in 2009, markets bottomed out by March. Those who held cash dry powder saw portfolios double within 18 to 24 months as the comeback gathered momentum.

To sum up, cash performs several critical functions during a crisis:

• It provides a buffer to avoid forced selling of quality assets at depressed prices. It helps investors meet immediate needs without liquidating core holdings. 
• It enables contrarian buying, allowing one to pick high‐quality equities at compelling valuations. 
• Third, it fosters emotional clarity. Knowing that a reserve of liquidity exists can reduce panic impulses, helping investors adhere to a long‐term equity market thesis instead of capitulating to short‐term fear. 

In this sense, cash is not a damper on performance. Instead, it is an enabler of opportunity.

So, What Should Investors Do?

Rather than choosing exclusively between cash or equities during a crisis, a balanced approach often yields the best outcomes. The following strategies can help you navigate downturns effectively:

• Maintain adequate liquidity: Keep at least 10 to 20% of your portfolio in cash or liquid funds. This serves as a safeguard against distress selling and preserves optionality during market corrections.
• Continue equity trading through SIPs: SIPs smooth out volatility by purchasing more units when prices fall. By continuing SIPs even during downturns, investors benefit from rupee cost averaging and compound growth when things normalise.
• Focus on quality stocks: Prioritise fundamentally strong companies with low debt, reliable cash flows and experienced management teams. High‐quality businesses tend to recover swiftly, and owning these through an equity market correction can lead to outsized long‐term gains.
• Avoid herd mentality: When headlines trigger panic selling, it may signal a buying opportunity. Rather than following the crowd, rely on a pre‐defined equity trading framework that assesses valuations, sectoral prospects and risk‐reward ratios.
• Rebalance opportunistically: Market downturns create windows for rebalancing asset allocations. If equities fall sharply, redeploy a portion of cash reserves into high‐conviction sectors. Conversely, if equity valuations surge above target levels, consider booking profits or rotating into defensive instruments.
• Monitor behavioural triggers: Recognise that fear and greed can distort decision‐making. Set rules based on valuation thresholds and portfolio risk limits. For instance, if the Nifty declines more than 10%, trigger a pre‐planned partial rebalancing to lock in new target weights.

By combining these tactics with disciplined equity market analysis, like studying PE ratios, free‐cash‐flow yield and RoE metrics, investors can maintain composure when volatility strikes, preventing costly mistakes driven by emotion.

Conclusion

Crises are inevitable in financial markets. Yet they also present fertile ground for long‐term wealth creation. Historical data shows that equities, despite steep corrections, rebound strongly and often within months. But it is worth remembering that cash remains indispensable for providing stability, optionality and emotional clarity when fear dominates.

Rather than viewing the debate as equity versus cash, savvy investors embrace a dual approach: retain sufficient liquidity to meet short‐term needs and capitalise on contrarian opportunities, while maintaining steady commitment to fundamentally sound equities. 

By mastering market behaviour, acknowledging behavioural pitfalls and adhering to a structured investment strategy, you can not only survive crises but also harness them as stepping‐stones toward lasting financial success.

Additional Read: Equity Meaning: What are Equity Shares | Mirae Asset