Learn How to Safeguard your Investments from Market Volatility

In the last few weeks, the stock markets have been volatile (or highly fluctuating) and most investors are puzzled as to how to react to the situation. Though there has been a recovery in market indices, the episode of sharp correction amid geo political uncertainties did cause agony for most investors.

While recent events often influence our minds to a higher degree, we need to realise that markets have always been ‘fluctuating’, and ‘volatility’ is an essential feature of equity investing. Thus, it is important to assess your risk profile to decide how much exposure is suitable for you before taking the plunge. However, you may need to do more to shield yourself during the unexpected twists and turns in your investing journey. Let’s look at some of these basic tenets that are ideal to hold on to while investing in equities.

Diversify your portfolio with mutual funds - Investing in equity and equity based assets is a great way to beat inflation. More importantly, in a diversified portfolio. We all know that stock prices are volatile, however, not all stocks move in the same direction in a given time. With a diversified mix of stocks in your portfolio, you can cushion the impact of volatility. Since most of us are ill-equipped to handle a large portfolio directly, an actively managed equity mutual fund is an ideal option. The other avenues to invest are exchange traded funds (ETFs) and index based mutual funds.  

Think long term – Once you are clear that you are in the equity markets for the long haul, you don’t need to worry much about the short term fluctuations. While the markets are unpredictable in the short term, we can look at avoiding losses by having holding periods in excess of 5 years, if we go by history. For instance, if you had been investing in BSE Sensex, every year over the last 42 years (and hold it for a period of 1 year), there would have been 14 instances in which you would have lost money. That’s a probability of loss of 33%. If you increase your holding from 1 year to 3 years, the probability of loss reduces to 17.5%. And for a holding period of 5 years, the probability of loss reduces to 7.9%.

Start your SIPs and stick with them – An SIP ensures that your instalments are invested through the ups and downs of a market cycle. A sharp correction in the markets can rattle even experienced investors resulting in discontinuing their SIPs. What we need to realize is that it is exactly the SIP investments done during market corrections that lead to the advantage of lower average cost per unit. Therefore, ensure that SIPs in well-chosen schemes are running as long as you have money to invest.

You don’t have to react

Another vital aspect to investing amid volatility is to possess the right temperament. Here are some tips to deal with volatility -

• Do not check the portfolio every day as it might lead you to react with unnecessary actions that could be detrimental to the portfolio.
• When markets are volatile, keep your emotions in check and think rationally  before making an investment decision.

   

It is not easy to time the market, and you cannot control the market forces. Therefore, it is important to stick to your investment plan, manage your temperament and be prepared to hold on to your investments for a long period of time amid volatile markets.

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