What Is Panic Selling? Impact During Market Downturns

2025-07-21

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Market fluctuations are simply a natural part of the broader economic picture. Temporary dips and jumps can sometimes feel unsettling; hence, a brief understanding of them only empowers you to make informed decisions. What’s worth learning about it is how these are based on market sentiments. Such times drive impulsive decisions. Some investors may start selling off stocks, and others might opt for reallocation, but acting in such a way is natural.

Today, let us take an informative look into one such impulsive behaviour that can arise during market downturns, panic-selling.

By learning what it is and the psychological factors at play, we aim to help you understand market volatility with a more strategic approach.

Key Takeaways

Panic-selling happens when investors let fear, often amplified by news reports, drive them to sell during market slumps.
Selling investments at these low points can lead to actual financial losses and prevent you from benefiting when the market eventually recovers.
Plans like ULIP schemes, portfolio diversification, and goal-based investing reduce panic and improve long-term outcomes.
With fund-switch options and tailored premium terms, ULIPs empower you to adjust without exiting the market.
Constant exposure to negative headlines can distort your perception and prompt irrational investment choices.

What is Panic-selling?

Panic‑selling is done when investors have the urgency to sell their shares due to a sudden market decline. This is primarily driven by unexpectedness rather than careful analysis. Rather than assessing a company’s fundamentals or long‑term outlook, they react to falling prices and negative news by liquidating positions at the worst possible moment. The key characteristics of panic‑selling:

Emotional Reaction: Decisions are made on impulse and anxiety, not on research or strategy.
Widespread Behaviour: When one investor sells in fear, it can trigger a chain reaction, amplifying downward pressure on prices.
Locked‑in Losses: Selling during a dip crystallises losses. Prices often recover over time, meaning hasty sellers miss the rebound.

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Why do Investors Panic‑sell?

Investor decisions during panic-selling are often influenced more by emotion than by reason. When market prices suddenly tumble, even experienced investors can find themselves gripped by the fluctuating market sentiment. The following are a few reasons why investors sell under panic:

Fear of Further Losses: When investors witness a sharp decline in their portfolio’s value, the instinctive response is often to cut their losses and exit the market. This reaction is generally hard‑wired into the brain. Just as one recoils from physical danger, investors instinctively try to escape financial distress.
Selling during this moment may feel like the safest option, but it can also mean realising losses that might have been temporary. Over time, markets tend to recover, and those who stay invested often see values rebound. On the contrary, panic-selling increases the chances of losses and reduces potential gains.
Herd Mentality: Humans are social creatures and often look to others for behavioural cues, especially in uncertain situations. Well, it is a similar case when it comes to investors. Unfortunately, such collective behaviour can drive prices down even further. Instead of relying on your own analysis, following the herd can turn a market correction into a full‑blown sell‑off.
Lack of a Long‑term Plan: Investing without clear objectives and a defined timeline is like navigating without a map. Short-term market ups and downs can feel overwhelming if you don’t have a clear plan. It makes it hard to see they’re just small bumps on the road to long-term growth.
A well‑structured financial plan detailing target returns, acceptable levels of risk and rebalancing rules provides perspective. It helps you see market declines as normal phases rather than an unexpected crisis.
Overexposure to News: Nowadays, news gets spread like wildfire. The unending stream of market updates, expert opinions and sensational headlines can create distress. While staying informed is important, too much information, especially when it’s negative, can drive impulsive decisions.
News stories often focus on worst‑case scenarios to capture attention, which can distort your risk assessment. Sticking to news intake from reliable sources and reviewing market developments at set intervals can help filter and maintain a rational mindset.

How to Avoid Panic-selling?

Panic‑selling is, indeed, an unsound financial judgement. It is essential to take a breath to pause and reflect on the market sentiments and take action accordingly. The following are a few approaches that you can use for the same:

Revisit Your Goals: When markets fall, remind yourself why you invested. Whether you’re saving for retirement, your child’s education, or a new home, keeping your end goal in mind helps you ride out short‑term losses.
Diversify to Stabilise: A mix of asset classes reduces risk. Consider equity, debt, and hybrid options. For instance, Unit Linked Insurance Plans (ULIPs) combine different types of investments, such as equity and debt funds, within a single scheme. It lets you switch between funds without immediate tax implications, helping you adjust your portfolio rather than sell in a downturn.

Did You Know?

Starting April 1, 2026, any ULIP policy with annual premiums over ₹2.5 lakh will be subject to tax on the returns earned.

Source: Upstox

Automate and Stay Consistent: Systematic Investment Plans (SIPs) invest fixed amounts at regular intervals, removing emotional decision‑making. Within a ULIP scheme, it offers a steady contribution along with insurance coverage. This approach averages out market volatility and discourages impulsive selling.

How do the Best ULIP Plans Save Your Portfolio During Market Downturns?

ULIPs (Unit Linked Insurance Plans) are investment products that also bring insurance coverage to the table. Promise4Growth Plus by Canara HSBC Life Insurance is one example of the top ULIP plans that you can explore.

Here’s what it offers you:

Promise4Wealth Plus, Promise4Care Plus and Promise4Life Plus are three different options to choose from based on the stages of your life.
All mortality charges deducted over the policy term are returned to your fund value upon maturity, enhancing overall returns.
Access a wide range of 12 fund options to match your investment style and risk appetite.
Also available through our online platform for easy and convenient policy management.
Premiums paid and benefits received may qualify for tax benefits as per the current provisions of the Income Tax Act 1961.

Conclusion

Making clear-headed investment decisions can feel tricky in moments of uncertainty. However, with an understanding of the concept, you can make clear-minded decisions. Rather than reacting on impulse, being prepared with a strong plan and the right tools offers peace of mind.

At Canara HSBC Life Insurance, our ULIP schemes are thoughtfully designed to support this very approach. They give you both market-linked growth and the stability of life cover. As you continue your financial journey, remember that even rough market waters can be managed with confidence.

Glossary

Market Sentiment: The overall mood or tone of investors in the market, driven by news or emotions, influences buying and selling.
ULIP Schemes: A financial product combining life insurance and market-linked investments with tax benefits.
Portfolio: A mix of financial assets like stocks, bonds, and funds owned by an individual to grow wealth or manage risk.
Equity: An ownership share in a company, often purchased as stocks, offering growth potential but with higher market risk.
Debt Funds: Investments primarily in fixed-income securities like government or corporate bonds, ideal for stable, low-risk returns.

FAQs

Panic-selling refers to hasty and emotional decisions by investors to sell their assets during market downturns.

It often leads to locking in losses and missing potential market recovery, harming long-term returns.

Emotional triggers like fear, herd mentality, and sensational news coverage drive impulsive selling.

Yes, ULIP schemes offer fund-switching flexibility and insurance protection, helping manage market risk calmly.

The best ULIP plans, like Promise4Growth Plus by Canara HSBC Life Insurance, offer diverse fund choices and life cover.

Market sentiment reflects investor mood, often driving prices up or down regardless of fundamentals.

Stay goal-focused, diversify your portfolio, automate investments, and avoid reacting to short-term market noise.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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