What does volatility mean in mutual funds? | Motilal Oswal

What does market volatility mean for mutual fund investors

Everyone loves an exciting ride on a roller coaster. The anxiety while climbing up and the thrill while hurtling down is nothing short of an adrenaline rush that anyone enjoys. Nonetheless, this is very far from ‘fun’ when the same thing is experienced by your financial portfolio. Market volatility is capable of playing havoc with your mind and your financial credentials as you view your portfolio reaching heights and then dropping to new lows due to market whims. Mutual funds can add substantial value to a portfolio, but these are nowhere near immune to the fluctuations in the market. 

  • The Meaning of Market Volatility

Basically, volatility in the market is a measure of how much the value of assets deviates from their mean. The effect of market volatility on mutual funds is usually measured through variance or standard deviation. A high-volatility investment is one that faces a significant deviation from the mean value in a particular period. Shifts can go up or down. In contrast, a low-fluctuating investment experiences a minimal deviation from the value of its mean within a particular time frame. Here, as there are only minimal fluctuations in value, these kinds of investments have a lower degree of risk. What this means is that, when it comes to the area of equity, the returns are uncertain. Hence, there is market volatility involved in such products. On the flip side, instruments termed as ‘fixed income’,  experience less volatility as these are linked with fixed flows of cash (fixed repayment and fixed interest). As a result, debt mutual funds may experience a lesser degree of price fluctuations than those associated with equity. 

  • Volatility and Mutual Fund Investments

With online trading today, you can invest in different kinds of mutual fund investments with ease. However, you must consider market volatility which can have an immense influence on patterns of investing and the ability to make logical decisions to invest. For instance, you may have two mutual funds, say X and Y. Let’s assume that both these have an NAV or net asset value amounting to Rs.100 in the first week and Rs. 120 in the tenth week. Nonetheless, one mutual fund may have been through more volatility than the other. You may think, in this example, that volatility doesn’t count for much as both the schemes invariably finish up at the same spot, giving the same amount of returns. You are not wrong to think this, but you should note that various investors react differently to fluctuations. When markets turn volatile, investors become highly impulsive. Decisions may be made at the spur of the moment, and these could be irrational. This may result in adverse effects on the portfolio at large. 

  • Mitigating Volatility

Before investors make investments, a plethora of questions may plague their minds. When is a good time to purchase mutual funds in a year? Is it possible for mutual funds to crash? If the stock market crashes, what happens to my mutual funds? These questions and more may be asked and considered, and all can be resolved through financial organisation and planning. By creating a diversified portfolio, risk  can be lessened, even under extreme price fluctuations in the market. 

  • Invest with a Super Brokerage

By investing with a sound financial brokerage like Motilal Oswal, you stand to choose a host of investments, not just mutual funds, and distribute your wealth to mitigate market volatility. Sticking to long-term investments can go a long way in tiding over the fluctuations of the markets.

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