How does market volatility affect investments?

posted by : Radhika Viswanathan


How does market volatility affect investments?

        Mutual Funds are without doubt a favoured mode of investment that earns you considerable returns over a period of time.  However, it is significant that as an investor, you need to be aware of a critical factor that generates these market returns i.e., Market volatility.


What is market volatility?

         Market volatility refers to the range of uncertainty regarding the change in the rate of an investment.  Increased volatility indicates a significant variation in the value of the investment during a specific time frame. This shift can be an upwards or downwards. Similarly, low volatility means the existing worth of the security has witnessed minimal fluctuation over a distinct period.


Is investment behaviour influenced by market volatility?

        Studies show that market volatility, investment prices and associated risk have a strong correlation. It is also perceived that a larger volatility rate is associated with a diminishing market and lesser volatility showcases a steady and growing market.

        During such unsteady situations it has also been noted that investors tend to react bearishly even sooner than the market by withdrawing investments in an attempt to shield themselves, and return as an active investor much later thereby ending up in the losing side. Therefore, it is crucial to be informed of the inconsistent and unpredictable nature of markets. Consequently, being a member of this volatile market and taking informed personal financing decisions can ease your investment journey to a great extent.


How to make investment decisions?

        There are many ways of gauging the volatility and risk associated with mutual funds. The simplest means of measuring the same is by understanding these simple terms:

  • Small- cap funds: Volatility is on the higher side

  • Mid- cap funds:Volatility is mostly high

  • Large- cap funds: Volatility is restrained


        It is critical to maintain a diversified portfolio to guarantee the impact of volatility is least felt. Selecting money instruments based on holding period, scope for volatility and associated risk will help you identify which area needs attention and what types of mutual fund investments you should focus in the future.


Also, asset allocation plays a large role in determining the performance of your investment portfolio in the long run. Hence, determining investments from among different classes based on the aforementioned criteria is an ideal step in order to limit financial risks and gain steady returns.


 Happy Investing!