The impact of market volatility on mutual funds: What you need to know

You have been saving and investing for years, choosing mutual funds you believed would provide long-term growth. Your investments generate good returns, and you have planned your retirement based on the development you have seen in your portfolio. However, the market suddenly experiences significant fluctuations, and volatility sets in, causing your funds to lose value.

You start to panic and doubt whether you made the right investment. But before making any impulsive decisions, it’s important to know that volatility is an evitable part of investing. While market fluctuations can affect returns, they can also present growth opportunities. Thus, let’s understand how market volatility can impact your mutual funds, so you can take necessary steps to safeguard your portfolio against potential losses and maximize returns.

mutual funds

Effects of market volatility on different types of mutual funds

Different mutual fund investment schemes react in different ways to market volatility. For example, funds investing in emerging markets can be more volatile than those holding blue-chip stocks. This is because emerging markets can be more unpredictable and subject to political or economic instability. Therefore, knowing the type of mutual fund you invest in and its exposure to market volatility is crucial in managing your portfolio.

Short-term volatility vs. long-term sustainability

Market volatility is not a time to make short-term decisions but rather an opportunity to remain consistent and focus on long-term goals. A long-term investment strategy helps weather market volatility better because fluctuations are usually higher in the short term, but it gradually decreases over time as the market recovers.

Also, if your selected mutual funds contain undervalued securities, holding them during volatility can help you make significant profits over time.

Asset class volatility

Some asset classes, such as equities, are more volatile than others. So, during volatile markets, the value of these assets often decreases. This decline, however, can create opportunities and bring long-term benefits. Investors prepared to wait for the markets to recover may benefit from buying mutual funds at a lower NAV during the volatile period and selling them when the market stabilizes, leading to long-term gains.

Market volatility can affect investors’ behavior, thus affecting mutual funds.

During volatile markets, some investors may panic and sell their shares, decreasing the value of the mutual fund. And when many investors sell their shares, the fund’s NAV falls even further.

In contrast, when the market is performing well, investors may invest in mutual funds aggressively, which can increase their value. To avoid such issues, it’s wise to follow a long-term investment strategy and not react to short-term market fluctuations.

Final words

Remember, investing is a journey that requires patience, discipline, and the right action plans to capitalize on market volatility.

A SIP (systematic investment plan) is one important strategy that can help you stay invested in mutual funds regardless of market volatility. At the same time, every new SIP installment gives you the benefit of diversification automatically. And through rupee cost averaging, you can leverage market fluctuations as a SIP helps you buy as per market conditions, thus, reducing your average investment cost over time.

To maximize these benefits, using a SIP calculator and planning your investment goals effectively is always advisable. The tool can help you compare different SIPs, project their estimated returns to select the right scheme and invest responsibly as per your budget.

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