As the bulls in the market regain strength and drive up valuations, there is a notable likelihood that we could witness a resurgence of volatility on the financial arena. The events of Wednesday's trading session may serve as a precursor to more frequent occurrences of such market fluctuations. Therefore, regardless of the specific market segment where one directs their investments, it is prudent to remain prepared for increased volatility in the financial landscape. It is advisable to refrain from making quick decisions to buy or sell assets solely based on short-term price fluctuations.
Market volatility impact on mutual funds is typically assessed using variance or standard deviation. High volatility means significant deviation from the mean in a period. Changes can be positive or negative. On the other hand, low volatility implies minimal deviation from the mean value within a specific timeframe.
Volatility is inherent in all financial markets. Thus, investing in equity-based instruments can be managed by taking a calculated risk. Like the investment guru Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
"Long-term investment should not be time bound and dependent on the market conditions. We have observed that equity markets are upward trending, however it may not be linear always and investors should not panic or change investment strategies," said Chirag Muni, Executive Director, Anand Rathi Wealth Limited.
Muni added: "Like to invest Rs 5 lakh, one needs to ascertain the timeline of investment. If the period is short-term i.e less than 3 yrs then one can invest Rs 5 lacs in 60:40 ratio in equity and debt. Long-term investors can allocate up to 80% of their assets in equity. This will help them generate atleast 12% return. This should be diversified across funds from different AMCs and categories while maintaining a market cap ratio of 50:30:20 in large, mid and smallcapsegments."
"In the last 4 major market dips (May' 2004 , Feb 2009, Mar' 2016, Mar'2020), whenever the market has dropped >20% , it has swiftly recovered in 5-6 months and so have the equity flows into Mutual funds, hence it is advisable to avoid knee-jerk reactions and watching the portfolio too much," said Devam Sardana, Business Head, Lemonn.
"The inherent volatile nature of equities as an asset class can be quite unnerving for equity mutual fund investors, especially for those who are relatively new to equity investing. However, sticking to the following basic principles can help effectively tide over market volatility," said Nilesh Naik, Head of Investment Products, Share.Market.
Naik further lists the basic principles of investing in mutual funds:
A Long-Term Perspective
It's important for equity mutual fund investors to realise that volatility is an inherent part of equity investing and in the short term, the market will be driven by sentiments. However, from a long term perspective, corporate earnings growth is the single most important factor driving the stock prices and the markets. Given the high long-term growth prospects for the Indian economy and businesses, it is important to invest in equity mutual funds with a long-term view.
Diversification and asset allocation
The metaphor “Don't put all of your eggs in one basket” may sound too banal, but the idea it conveys is relevant for mutual fund investors. So ensure that you spread your investments across different asset classes (equity, debt, gold, etc) to reduce the risk arising in any of the asset classes. Maintain an asset allocation that aligns with your risk tolerance and goals and ensure that your portfolio asset allocation is reviewed during periods of extreme volatility. This could help course correct and maintain the desired asset mix to manage the risk through optimal exposure to various asset classes. A byproduct of this exercise is that it systematically helps you to take advantage of buying during market-falls and also booking profits in case of a significant run-up in one particular asset class.
Stay Invested with SIPs
Investing through SIPs automatically inculcates discipline and helps investors benefit from rupee-cost averaging during times of market volatility. That is because systematic investments purchase more units when prices are low and fewer units when prices are high, potentially lowering your average cost per unit.
Don’t allow emotions to drive your investing decisions: Experienced investors understand that market downturns often offer great investment opportunities. So rather than reacting impulsively based on emotions, you need to stick to an investment plan and consider market falls as a potential buying opportunity for long-term growth.
Ignore the noise
During times of market volatility, you will invariably witness continuous news flow that can lead to fear or panic among investors. It’s important to avoid reacting to such daily news noise and focus on your long-term investment goals.
A simple thumb rule
Sardana added: "While we love to live by the adage "short term pain, long term gain", there is a thumb rule that retail investors can use to avoid sleepless nights
1. If you are uncomfortable with the portfolio drawdown, it is time to review the portfolio and type of funds with a potential to de-risk with hybrid and fixed income funds and look at portfolio rebalancing.
2. If the time horizon is 3-5 years or more, as a user I would not be too worried about the short term moves and would continue to concentrate on the goals.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. This content is exclusively for educational and informational purposes only. These are not Business Today's views.
