Make market volatility your friend

Recently, equity markets experienced heightened volatility, with NIFTY VIX index surging over 100% over the last month. NIFTY 50 index fell ~6% on the day of election results, however, the markets rallied next day with the index going up by ~4%. Notably, this is not the first instance of such extreme volatility, nor will it be the last. Volatility has been the nature of the markets.

So, what should investors do to tackle such situations?

Invest with a long-term view

Equity markets do not move up in a linear fashion. Short-term movements are influenced by various news and events, both domestic and global. However, over the long term, returns tend to align with the underlying economy’s growth.

Consider the following table, which illustrates the performance of various asset classes over long term. Despite short-term risks and volatility, equities have outperformed other asset classes in the long run. They have beaten inflation by a significant margin. Investors can capitalize on market volatility by strategically investing during such downturns.

Source: Bloomberg, RBI Handbook of statistics on Indian Economy, World Gold Council, SBI. ^Average Inflation is shown for comparison with returns from various asset classes. Data is of CAGR returns of various asset classes (Equity, Gold, Bank FD) for the period March 31, 1980 till March 31, 2024, ^Average Inflation - Data as on March 31, 2024. Equities are a volatile asset class. However, volatility in returns generally reduces as holding period increases. Above asset classes are not strictly comparable. Above chart is for illustration purposes only. Past performance may or may not be sustained in future and is not a guarantee of any future returns.

Invest via Systematic Investment Plan (SIP) route

SIPs allow you to invest a fixed amount regularly, monthly, quarterly, in mutual fund schemes. This strategy averages out the impact of market volatility. It’s a disciplined approach that avoids trying to time the market. Read the SIP average story to know more about how SIPs help beat market volatility.

Follow asset allocation

“Don’t put all your eggs in one basket” is an age old saying and applies to investments as well. Asset Allocation is one of the important steps in one's investment strategy. It means to diversify investment portfolio among different asset classes such as equities, fixed income, gold, etc. Diversification across asset classes helps reduce overall portfolio risk. Mutual Fund houses offer various asset allocation products, investors can choose such products based on their risk appetite and investment horizon to mitigate market volatility.

Seek Professional Advice

Consult a financial advisor who understands your goals, risk tolerance, and investment horizon. They can guide through volatile periods and help make informed decisions.

Volatility tends to even out over extended periods. By staying invested for the long term and following asset allocation, one can ride out short-term fluctuations and benefit from overall market growth. Patience and discipline are key during such volatile times.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.