Here’s How to Overcome Market Volatility

Market volatility is a normal aspect of investing. It means ups and downs, such as high fluctuations in market prices, which impact the mutual funds' Net Asset Value (NAV), making it go up and down. It is difficult to understand and emotionally upsetting, particularly when their holdings lose value dramatically over a short period. But volatility is not always bad with the right approach, it can be managed effectively and even leveraged to an investor’s advantage.

Understanding Market Volatility

Market volatility is generally due to 

• Changes in monetary policy, like interest rates and repo rates 
• policy announcements
• Global events like the  financial crisis or Fed meetings 
• Speculative trading and sentiment-driven movements
• Domestic news impacting sectors, industries, or highly concentrated stocks in an index 
  
  The cause may vary, but the impact is similar. It will test the investors' discipline that the market is testing. 

Strategies to Manage and Overcome Volatility

1. Continue Investing Through Systematic Investment Plans (SIPS)

The most effective way to handle volatility is a systematic investment plan (SIP). It allows investors to contribute a fixed amount regularly, regardless of market conditions. During periods when markets are down, SIPS enable purchasing more units at lower prices, and fewer units are bought during market highs.

Known as rupee cost averaging, this helps reduce the average cost of investments over time and eliminates the pressure to time the market. It's a great way to achieve higher returns in the long term. 

2. Avoid Stopping SIPS During Market Corrections

Investors' most common mistake during volatile periods is stopping their SIP due to fear. This action allows them to accumulate mutual fund units at lower valuations. The long-term benefit of SIP is realised only when investments are sustained across all market phases, including down phases.

Increasing SIP contributions during market dips often results in superior average purchase prices and enhanced long-term gains.

3. Maintaining a Long-Term View

Volatility is often exaggerated in the short term, but its effect tends to diminish over the long term. Most mutual fund investments are designed to serve long-term financial goals such as retirement, home purchase, or children's education. Therefore, reacting to short-term fluctuations by redeeming investments or altering asset allocations can be counterproductive.

Remaining invested through market cycles allows the portfolio to recover and benefit from future growth phases.

4. Diversify the Portfolio

Diversification is an important risk management technique. A diversified portfolio minimises the combined effect of volatility in one sector or asset class. In mutual funds, this means investing in several:
Various market capitalisations, including large-cap, mid-cap, and small-cap funds
Several asset classes, such as equity, debt, hybrid, and gold funds
Different industries and investment themes
Because small and mid-cap funds tend to be more volatile, hedging them with large-cap or hybrid funds stabilises returns during choppy market times.

5. Do Not Act Based on Emotions

Emotional investing tends to be fueled by fear during market declines and greed during rising markets. Moving on emotion can result in bad financial choices, such as selling a market too early, redeeming the funds at a loss, or chasing the most recent top-performing fund without proper research.

There should be a well-planned investment strategy with set goals to avoid such impulsive investments. Logical and regular review of the investment plan, not emotional, will ensure continuity.

6. Keep a Separate Emergency Fund

Market volatility can become a genuine problem when personal emergencies force an investor to redeem long-term investments at an unfavourable time. To avoid this, it is essential to maintain an emergency corpus in highly liquid instruments like savings accounts, fixed deposits, and other liquid funds.

Conclusion

Market volatility is not avoidable in investment, but being disciplined during fluctuations, not stopping SIPS, keeping a long-term view, taking the benefit of the dip, diversifying wisely, and staying invested could lead to excellent wealth creation in the longer term.