How to Keep Your Mutual Funds Safe

 

Created by Labh

Market Volatility Explained: How to Keep Your Mutual Funds Safe

In the world of investing, one concept that everyone encounters sooner or later is market volatility. It’s often talked about in news headlines, but what does it really mean? More importantly, if you have money in mutual funds, how can you protect your investments from the ups and downs of the market?

In this blog, we’ll break down what market volatility is, what causes it, and most importantly, how you can manage it to safeguard your mutual fund investments. We’ll keep things simple and practical, so even if you’re new to investing, you’ll find clear strategies you can apply right away.

What Is Market Volatility?

Simply put, market volatility refers to the rapid and unpredictable changes in the price of investments like stocks and mutual funds. When the market is “volatile,” it means prices can jump up or down in a short time. Imagine you check your mutual fund balance today, and it’s worth Rs. 1,00,000. Tomorrow, it might be Rs. 1,02,000, or it might have dropped to Rs. 98,000. This swing is a classic example of market volatility.

• High Volatility: Prices fluctuate widely, often due to unexpected events like global news, economic changes, or political developments.
• Low Volatility: Prices remain more stable and predictable, with smaller daily changes.

Why Does Market Volatility Happen?

Market volatility can occur for various reasons, many of which are out of any individual’s control. Here are some key causes:

1. Economic Events: Major events like inflation, interest rate changes, or unemployment data can affect how people feel about the market. When confidence is shaken, people may sell off their investments, causing prices to drop.
2. Global News and Events: Things like international trade issues, wars, or even a pandemic can affect global markets, causing prices to swing.
3. Investor Reactions: Often, volatility is a result of human behaviour. When prices drop, people sometimes panic and sell, which causes prices to fall further. Conversely, when prices are rising, there’s often a rush to buy, which drives prices even higher.
4. Company-Specific News: Sometimes, specific news about big companies (like a major company’s profits going down) can affect the overall market. Because mutual funds are often invested in these companies, any bad news can have a ripple effect.

Is Volatility Always Bad?

Not necessarily. Volatility is a normal part of the market, and it’s not always a bad thing. Short-term fluctuations can actually create opportunities if you know how to respond to them.

• For Long-Term Investors: If you plan to keep your mutual fund investments for 5, 10, or 20 years, short-term volatility may not matter much. Over time, the market tends to rise, and small dips or jumps along the way get smoothed out.
• Buying Opportunities: For some investors, a market dip due to volatility is an opportunity to buy more units of a mutual fund at a lower price.

Example: If a mutual fund is priced at Rs. 100 per unit and due to a market dip falls to Rs. 90 per unit, buying more units at this lower price can lead to higher gains when the price eventually recovers.

How to Protect Your Mutual Fund Investments from Market Volatility

Let’s explore some practical strategies to manage and protect your mutual fund investments when markets are volatile.

1. Invest for the Long Term

One of the best ways to deal with market volatility is to adopt a long-term perspective. Historically, the market tends to go up over time, even though it has its ups and downs.

• Benefit of Staying Invested: By staying invested through periods of volatility, you allow your investments to recover and grow over time.

Example: Imagine you invest Rs. 1,00,000 in a mutual fund today. In five years, it has fluctuated a lot, but it has averaged an 8% annual return. By the end of five years, your Rs. 1,00,000 grows to Rs. 1,46,000, even though the market had ups and downs along the way.

2. Diversify Your Investments

Diversification means not putting all your money into one type of investment. By spreading your money across different types of funds, you reduce the risk of one sector dragging down your entire investment.

• Equity Funds and Debt Funds Mix: You could put part of your money in equity funds (stocks) and part in debt funds (bonds). Debt funds tend to be less volatile than equity funds.
• Sector Diversification: Some mutual funds invest across multiple sectors, like technology, healthcare, and manufacturing. This way, even if one sector is struggling, others might be doing well, which stabilizes your portfolio.

Example: If you invest Rs. 1,00,000, you could split it by putting Rs. 60,000 in equity funds and Rs. 40,000 in debt funds. If the equity market dips, your debt fund’s stability can balance out the overall impact on your portfolio.

3. Use Rupee-Cost Averaging (Systematic Investment Plan or SIP)

Rupee-cost averaging is a method where you invest a fixed amount regularly, like every month, rather than a lump sum. This is often done through a Systematic Investment Plan (SIP), which is very popular in India.

• How It Works: By investing, say, Rs. 5,000 each month in a mutual fund, you buy more units when prices are low and fewer units when prices are high. Over time, this averages out the cost of your investments, helping you to avoid buying only at high prices.

Example: You start an SIP of Rs. 5,000 in a mutual fund. When the market is down, Rs. 5,000 buys more units, but when it’s up, it buys fewer units. This helps reduce the average cost and lowers the impact of volatility on your portfolio.

4. Keep an Emergency Fund Separate

To avoid needing to pull out investments during a downturn, it’s a good idea to keep an emergency fund aside. This fund can cover unexpected expenses, so you won’t have to touch your mutual fund investments.

• How Much to Save: Ideally, your emergency fund should cover 3 to 6 months of expenses. This way, even if the market is down and you need cash, you won’t need to sell your mutual funds at a loss.

Example: If your monthly expenses are Rs. 30,000, an emergency fund of Rs. 1,80,000 can provide a financial cushion without disrupting your long-term investments.

5. Choose Balanced or Hybrid Mutual Funds

Balanced or hybrid funds combine stocks and bonds in a single fund, giving you a blend of growth and stability. These funds are less risky than pure equity funds because they also hold debt instruments, which are generally more stable.

• How They Work: Balanced funds automatically balance the risk by shifting between equities and bonds. In volatile times, they might hold more in bonds, and during market growth, they increase equity exposure.

Example: Let’s say you invest Rs. 1,00,000 in a hybrid fund. If the market is very volatile, the fund might shift a larger portion into bonds to keep the fund’s value more stable.

6. Stay Informed but Avoid Frequent Monitoring

Staying informed about market trends can be helpful, but frequently checking your investment value can lead to unnecessary stress and impulsive decisions.

• Avoid Overreacting: When you constantly monitor your investments, every small dip can feel like a reason to sell, even if it’s just a temporary fluctuation. Trust the plan you have in place and avoid the urge to act on short-term movements.

Example: Check your mutual fund performance quarterly rather than daily. This will help you stay aware without getting caught up in the daily ups and downs.

7. Rebalance Your Portfolio Regularly

Rebalancing means adjusting your investments back to your original allocation as they grow or decline. For instance, if you wanted a 70-30 split between equity and debt but find that your equity has grown to 80%, you might move some back to debt to maintain the balance.

• Why It Matters: Regular rebalancing helps maintain your risk level, so you’re not overly exposed to high-risk investments when markets are volatile.

Example: If your Rs. 1,00,000 investment grows and becomes Rs. 80,000 in equity and Rs. 30,000 in debt, you could shift Rs. 10,000 from equity to debt to keep the balance you initially planned.

Rebalancing your portfolio helps keep your investments aligned with your financial goals. By periodically reviewing and adjusting, you can maintain the right mix of risk and stability, ensuring your money works as effectively as possible over time. Remember, small adjustments can make a big difference in the long run.

The market can be unpredictable and challenging, but that shouldn’t hold you back from achieving your full potential. With professional expertise and guidance, you can navigate the fluctuations with confidence. While we can’t control the market, we can strategically manage your funds, steering them toward safer and more rewarding opportunities.

At Labh, our team, founded by alumni from IIM Ahmedabad, offers research-backed mutual fund services to help optimize your returns while minimizing risk. As an NISM VA Certified firm, we tailor portfolios to suit your financial goals and secure your future.

Join Our Beta!