Here’s why market volatility isn’t all bad for mutual fund investors

Volatility in mutual funds often carries a negative perception. While price fluctuations can be unsettling, they are part of the investment journey, and returns generally don’t come without them. Savvy mutual fund investors understand that volatility, when managed well, can be a powerful ally for long-term gains.

In investing, volatility refers to the degree of price variation in a mutual fund over time. High volatility implies significant price swings, while low volatility reflects steadier movement. Factors such as economic conditions, interest rates, and performance of a fund’s underlying assets—whether stocks, bonds, or commodities—play a key role in shaping this volatility.

Experienced investors have seen how the Indian stock market has faced volatility during events like the 2008 global financial crisis and the 2020 COVID-19 crash. However, it's crucial to remember that these moments can also present unique opportunities. Historically, investing in the aftermath of market turbulence has led to promising returns over the long term.

Volatility as an opportunity

• Buy Low, Sell High: Volatile markets allow investors to buy assets at lower prices during downturns and sell them at higher prices during recovery phases. Seasoned mutual fund investors often capitalize on these price swings by following a buy-low-sell-high approach.
  

• Rupee cost averaging: Systematic Investment Plans (SIPs) are particularly effective for harnessing volatility. By investing a fixed amount regularly, you buy more units when prices are low and fewer units when prices are high, averaging out the purchase cost over time. This strategy can significantly enhance returns over the long run.
  

Risk management and diversification

Understanding risk: Knowing volatility level of a fund helps assess the associated risk. Higher volatility in a fund tends to be riskier but offers higher potential returns. On the other hand, lower volatility in a fund prioritises stability. Mutual funds through various hybrid schemes help you align your specific investment choice with your risk tolerance.

Diversification: Don't put all your eggs in one basket. By diversifying across different types of funds with varying volatility levels, spread your risk. For instance, balancing equity funds (higher volatility) with debt funds (lower volatility) can create a more balanced portfolio. This is a good example of making volatility work for you.

Keeping a long-term perspective

Short-term volatility is less relevant for long-term investors. While markets have fluctuated due to global events, political changes, and economic shifts, investors who maintained a long-term outlook have often been rewarded.

For example, India's benchmark indices, the Sensex and Nifty, have trended upward over the years, despite temporary dips. Similarly, long-term mutual fund investors who stayed the course through market volatility have reaped substantial gains over the past 10–20 years.

In summary, rather than fearing volatility, consider it an opportunity for growth. Embracing a long-term approach and disciplined strategy can make market fluctuations work in your favor.

Disclaimer: The article is authored by Vishaljith Vaman,Co-Founder,Roopamoney Investments. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class. This article is published by the Insider Studios team. You can get in touch with them on insiderstudios@businessinsider.in.