Tips For Mutual Fund Investing In A Volatile Market

Market volatility can be scary, but it also offers opportunities for mutual fund investors. Prajwal Wakhare explains mutual fund investing in a volatile market, highlighting strategies like SIPs, diversification, and rebalancing to help manage investments during turbulent times and turn market fluctuations into long-term gains [EasyDNNnews:PaidContentStart]

Indian equity investors are witnessing a spike in market volatility amid concerns over a slowdown in urbanrural demand for FMCG, reduced GDP expectations, and the weakening of the rupee against the dollar. With the Sensex down 11 per cent from its peak, mutual fund investors face a dilemma: Should they book profits now or continue gradually increasing SIP contributions? The latest decline in the domestic market has primarily impacted thematic funds, with the NAVs of PSU and infrastructure funds dropping over 12 per cent in the past month. 

Similarly, the Mid-Cap and Small-Cap funds have seen their NAVs fall by 10 per cent during the same period as of January 15, 2025. Many financial advisors view the current market correction as an opportunity to accumulate additional mutual fund units at lower NAVs. The following graph of Sensex, mutual fund net inflow/outflow of funds and INDIA VIX shows how rising volatility has impacted the mutual fund industry’s fund flows. Higher volatility has caused a dip in the benchmark index and provided an opportunity for mutual fund investors in the past to accumulate more units. 

Sensex, Mutual Fund Net Inflow/ Outflow & INDIA VIX 

Volatility: What it Means for Mutual Fund Investments
Volatility measures how much an asset’s price fluctuates over time. As shown in the chart below, the asset price moves with heavy ups and downs as the price changes significantly, causing more volatility and increasing the risk. 

On the other hand, low volatility refers to the characteristic of an asset whose price experiences relatively small fluctuations over a specific period. It indicates stability in the price movements, as shown in the chart below. 

In mutual funds, volatility is often measured using standard deviation. A higher standard deviation means more significant fluctuations in returns, and a lower standard deviation shows stability in returns fluctuating less around the average returns. For example, Parag Parikh Flexi-Cap Fund has an annual standard deviation of 11 per cent. With an average return of 20 per cent annually it is likely to see returns from 9 to 31 per cent in a year. In comparison, Quant Flexi-Cap Fund has a higher standard deviation of 17 per cent, indicating more volatile returns. If it has an average return of 20 per cent, then returns could range from 3 to 37 per cent. 

Equity investments are more volatile because returns can vary widely, making them riskier. On the other hand, fixed-income investments like debt mutual funds are less volatile as they involve stable cash flows, such as fixed repayments and interest, leading to smaller price changes. But what causes these higher and lower phases of volatility in the market? There are various factors that infuse volatility in the markets. Let’s see them thoroughly: 

Key Drivers of Volatility and their Impact on Mutual Funds

1. Economic Data and Indicators - Market movements often respond sharply to economic reports like GDP growth, inflation, or unemployment figures. For example, when India reported higher-than-expected GDP growth in 2023, the stock markets rallied as investors grew optimistic about economic recovery. Conversely, the recent slowdown in urban and rural demand in the FMCG sector led to a twice-reduced GDP forecast for FY25. Earlier, it was reduced to 6.6 per cent from 7.2 per cent, and now it has reduced to 6.4 per cent – one of the reasons why Indian markets corrected recently.

2. Monetary Policy and Interest Rates - Central banks, like the Reserve Bank of India (RBI), influence markets through interest rate decisions. For example, when the RBI increased rates in 2022 to control inflation, borrowing costs rose, impacting businesses and slowing market growth. Such decisions can lead to market volatility as investors adjust their expectations.

3. Geopolitical Events - Global tensions can shake markets. A recent example is the conflict between Israel and Iran, which heightened uncertainty in October 2024. Oil prices surged, and the markets experienced swings as investors factored in potential disruptions to global trade.

4. Global Economic Events - Events in one part of the world often ripple across the global markets. For instance, China’s economic slowdown in 2024 affected everything from the global oil market to the Indian exports of spices. Similarly, during the corona virus pandemic, the markets worldwide saw wild fluctuations as investors reacted to lockdowns and economic uncertainties. 

Equity mutual funds, which invest primarily in stocks, tend to experience the most pronounced impact during volatile times, as stock prices can swing wildly due to economic events, market sentiment, or geopolitical factors. Bond funds, though generally more stable, can also be affected by interest rate changes or credit risk concerns during market turbulence. Additionally, market volatility may cause investors to react emotionally, leading to large inflows or outflows from mutual funds, further affecting their performance. 

The Magic of Managing MF Investments
Managing your mutual fund investments during market volatility can be tricky for investors. Here are some tips to help you manage your mutual fund portfolio during volatile times:
■ Stay on the Course - Market volatility is a natural part of investing. When starting your mutual fund journey, focus on your financial goals and avoid distractions from short-term market swings. Volatility can be an advantage, allowing you to buy more quality mutual fund units at lower prices. Staying calm and consistent can lead to long-term benefits when the markets recover.
■ Smart Investing with SIP - Choose mutual funds based on your risk level, financial goals, and investment horizon. Start a systematic investment plan (SIP) for disciplined investing. It lets you invest a fixed amount regularly in mutual funds. Instead of a lump sum, you invest a predetermined amount monthly, allowing you to benefit from rupee cost averaging. Taking a look back at Nifty 50, if we had made a SIP of ₹1,000 per month from January 2004 to December 2024, the investment costing ₹2,52,000 turned ₹12,75,335 with CAGR returns of 13.55 per cent, showing that volatility doesn’t impact on long-term investment.
■ Stay Committed to SIP - If you are already a SIP investor, keep investing through SIP, even during a volatile market. You will buy more units at lower prices and profit when the market rises. Consider topping up your SIP in declining volatile markets to take advantage of lower prices.
■ Portfolio Asset Allocation - Market volatility can reduce the value of your investments. To avoid significant losses. Strategic asset allocation among equity, debt and commodities helps balance poor-performing asset classes with gains from other asset classes. There are various asset allocation compositions, as given in the table below:

■ Prioritising Quality Over Risk - Focus on reducing risk and prioritising quality in your portfolio, especially with equity investments. Explore small-caps, mid-caps, and sector funds during the start of the bullish markets, but avoid overloading any single category. Diversify your investments to safeguard against volatility and potential losses.
■ Smart Diversification for Stability - Diversifying your mutual fund investments is key to managing risk and achieving stable returns. You can reduce volatility and protect your portfolio by spreading your investments across different categories—Large-Cap, mid-cap, and small-cap funds. Large-cap funds are more stable, while small- and mid-cap funds carry more risk. The following table shows different portfolio diversification strategies. 

As mentioned, returns are hypothetical and only for understanding purposes. Investing in low-cost index funds also helps diversify. These funds track a market index and perform more consistently than actively managed funds, offering lower risk for conservative investors. A well-diversified portfolio ensures better risk-adjusted returns and resilience during market fluctuations. 

■ Tracking and Rebalancing the Portfolio - During periods of high volatility, your asset allocation can shift from your intended balance. For example, if equity funds fall, they may take up a smaller portion of your portfolio than planned. Regular portfolio rebalancing can help you realign your investments with your original risk tolerance and goals. Review your portfolio every 6-12 months and rebalance if necessary. If your equity allocation has become too low due to market declines, consider rebalancing by buying more equities and vice versa, as shown in the below figure.
■Stay Informed, Invest Smartly - Building a strong investment portfolio requires staying updated on market trends and events, both globally and locally, especially during volatile situations. Changes in government policies and economic indicators like unemployment, GDP, and inflation can impact various sectors and stock prices. You can adjust your portfolio to make smarter investment choices by staying informed. 

Conclusion
We see that volatility is part and parcel of investing. However, how you react to volatility and market whipsaws is entirely in your hands. As suggested in this special report, investing in mutual funds with pre-defined goals helps you stay focused and avoid panic during volatile markets. The powerful tool of SIP plays a crucial role in such situations, but the key is discipline. Additional measures like diversification, portfolio asset allocation, rebalancing, and prioritising quality mutual fund schemes help mitigate the volatility risks. 

You can easily spot high and low-volatility mutual fund schemes by using standard deviation, which provides insights into the historical fluctuations of specific fund schemes. With a clear strategy and patience, you can weather market volatility and become stronger in the long run. The overall picture suggests that the market volatility is not bad for mutual fund investors. Instead, it provides another opportunity for investing. 

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]