What does Volatility mean in the Stock Market
Volatility in the market is a measure of how much an asset’s price fluctuates. It is calculated by averaging the difference between a stock’s highest and lowest prices over a period of time. A stock that has a higher propensity to climb also has a higher tendency to collapse. Many mutual fund investors fear when the market is very volatile, not realizing that when the market is down, they may purchase more units since the unit prices would be lower. Similarly, when the unit prices are greater, they will obtain bigger returns on their investments. They may take advantage of market volatility and generate long-term financial appreciation this way.
Before we go through how market volatility might affect your returns and how to deal with it, let’s go over some fundamentals about mutual funds and the advantages they provide.
How do Mutual Funds work?
Mutual funds are financial entities that invest in stocks and other assets to provide attractive returns. To create profits, investors’ money is pooled and invested in stocks, bonds, and other securities. Mutual funds are unquestionably one of the finest strategies to build money for the reasons listed below:
Higher returns
Mutual funds may outperform conventional investing options including gold, fixed deposits and real estate. Mutual funds invest in market-linked assets in order to provide investors with attractive returns. Over the last ten years, equities mutual funds have generated average returns ranging from 10% to 15%, according to statistics.
Disciplined investment
You may develop the habit of frequent investing by investing in a mutual fund via a SIP. When you invest in a SIP, a certain amount is invested on the same day each month, gradually incorporating it into your monthly budget. Regular investing will assist you in achieving your financial objectives in a methodical and disciplined way.
Fund Manager
Mutual funds are professionally managed by fund managers with many years of expertise who research the markets, analyze them, and manage the investments to obtain optimum results. You may also feel confident that mutual funds are safe and transparent since they are supervised by the Securities and Exchange Board of India (SEBI) laws.
Diversification
By spreading your assets across several asset classes, mutual funds lower the risk of your investments. Sudden swings in one stock may be offset by the performance of the fund’s other holdings, lowering total risk. To limit risk even further, one might invest in a variety of mutual funds. A financial adviser can assist you in balancing your portfolio by recommending appropriate funds.
Convenience
With the aid of internet investment facilities, investing in a mutual fund has become more simple and easy. You may start investing in mutual funds with only a few clicks. Even the KYC (Know Your Customer) procedure for investments under Rs 50,000 may now be completed online. Mutual fund investments made on the internet are quick, and the fund’s success may be tracked.
What impact does market volatility have on your investment returns?
Many investors mistakenly associate market volatility with ‘risk,’ yet volatility is really a response to or anticipation of a risk occurrence. In asset classes where attitudes dictate prices or when there is a lack of guidance regarding where the business or asset class is heading, there is a lot of volatility. Sharp changes in the performance of an asset are caused by volatility.
Mutual fund investors may believe they are losing money due to market volatility, and as a result, many investors withdraw from mutual funds when they feel that the funds are not doing well. This method is harmful to your investing objectives since the funds’ performance may recover and, over time, provide you with very high returns. As a result, if you want to get the best profits, you should invest in mutual funds for at least 5 years.
How can you deal with the market’s turbulence?
A brief period of market volatility should not worry you as an investor since, as previously said, it will be balanced out and may still provide you with significant returns if your money is invested for a longer length of time. You just need to be concerned about the lengthy volatility period. However, you should keep in mind that market volatility is unavoidable, and it is also the reason why your investments are profitable.
Further Key Takeaways
- Volatility should not be a concern if your investing horizon is 10 years. The consequences of short-term volatility may be smoothed out over a ten-year timeframe. You should adhere to your investing objectives since you know you’ll make large profits at the end of the time you’ve invested.
- At least once a year, review and rebalance your mutual fund portfolio. To some level, this will assist you sort out the consequences of volatility.
- SIPs are a great way to invest in mutual funds. SIPs are one of the greatest strategies to invest in mutual funds since market timing and volatility are minimized.
- Invest in a combination of stock and debt mutual funds while investing in mutual funds. Because debt funds are low-risk and less influenced by volatility, they will hedge out the volatility even if equities funds do not perform well.
Wrapping Up
When the market is turbulent, most mutual fund investors make the error of withdrawing, and as a result, they fail to meet their investing objectives. Investors should keep in mind that although volatility is an unavoidable aspect of mutual fund investing, if you follow the suggestions above, you can overcome it and meet your investment objectives. Now that you understand how market volatility may be utilized to your advantage, you can confidently invest in mutual funds without fear.
