Mutual funds are a potential investment vehicle to cater to multiple needs from short term parking of funds, tax savings and wealth creation. While talking about mutual funds, it is essential to be aware about the concept of volatility and how volatility can impact your product selection.
Simply put, volatility is the unpredictable and rapid change in a situation whereas volatility of capital markets is the change in the prices of the securities over time. If the price of security remains relatively stable, it is termed as low volatile securities. On the other hand, if the price of securities fluctuate, it is termed as high volatile securities.
There are multiple factors that can impact the inherent volatility in the capital markets as well as the volatility in individual securities. When it comes to mutual funds, the concept of volatility in relation to the overall capital markets is what one should understand and incorporate in his/her investment decisions.
Talking about investments, we have a natural tendency to expect more than we invest. Now, what if you come to know that the invested amount will not fetch you assured returns. This uncertainty is known as volatility. This situation which creates a feeling of fear in the minds of the common man needs to be addressed in the right way.
In order to tackle market volatility, it is important to understand volatility and know the benefits it has to offer. Uncertainty or volatility is a part of the equity market and here are a few points on how you can benefit from it.
Do not panic
Talking about stock market volatility, it is important for an investor to know that volatility is a part of investing. As every action has a reaction, every stable situation is bound to turn volatile at some point. Knowing how to tackle market volatility, is the key.
You must have certainly planned your finances and allocated funds accordingly to meet your goals; so don’t let the short-term hiccups distract you. Remaining unperturbed of the situation and look at it in an optimistic manner. It might make you realise that volatility can actually help you acquire more mutual fund units that might add up to your returns.
Do not withdraw
The thing with finances is, its easy to withdraw but hard to put it back. If you have invested for a long-term, say for a period of 10 years, a short-term volatility shouldn’t bother you. While short-term debts and bank deposits are a good bet for short-term goals, you might want to consider a few things like the investment horizon, risk involved, asset allocation, fund performance, etc. before investing in an equity mutual fund for a prolonged period.
Taking volatility in your stride
Make volatility work for you in your favor. Now the question arises-How? Look at having an asset allocation in place. As it is rightly said – “Do not put all your eggs in one basket”. You too should consider various investment options depending on your risk-taking capacity, goals that you intend to fulfil and investment horizon.
Take for instance SIPs. SIP stands for Systematic Investment Plan and is a disciplined form of investing. SIP is a tool and one of the most effective techniques to benefit from volatility. In a nutshell, the primary benefit of investing in mutual funds via SIP is beneficial for investors in the long run as rupee cost averaging helps in hedging the risk against up and downs of the.
How asset allocation will help you
It is disappointing for any investor to see the value of their hard-earned money not perform well during volatility. But if you have allocated your assets taking your risk appetite into consideration, you might find that if one of your assets doesn’t perform well, another asset of yours might turn out to yield a better response and balance out the risk overall.
It is however necessary to review and allocate assets timely to rebalance your portfolio and stay invested against all odds.
Conclusion
Volatility is a part and parcel of every financial market. Therefore investing in any equity-based instrument can be tackled by taking a calculated risk. Understand the market signals and allocate your assets wisely. Happy investing!