Make volatility your portfolio’s friend

7 MinsApr 7, 2021

There is no escaping volatility when investing in equities. As a smart investor, you should make volatility your friend, in your wealth-creation journey. Your investment success would depend to a large extent on how you use this inherent quality of the equity market to your advantage. Here are a few strategies you can follow to address the volatility in equity markets:

invest in a volatile market


(1) Stagger your investments – It is impossible to predict which way the stock market will move or by how much. Hence, for retail investors, the safest way to invest is in a staggered manner. This can be done using the Systematic Transfer Plan (STP) or Systematic Investment Plan (SIP) routes via mutual funds.

The STP route – In this case, you initially invest a lump sum amount in one mutual fund and then transfer to other mutual funds, (either within the same fund house or in other fund houses) depending on your needs and risk profile. For instance, if you have an investible surplus, and want to set aside money for your long-term financial goals; it might make sense to initially invest the money in a Liquid Fund and then do systematic transfers from there into an equity-oriented mutual fund or a hybrid mutual fund suiting your investment horizon and risk profile.

Say, you earned a bonus of Rs 5 lakh and wish to deploy this for your child’s future education needs. You may invest this amount equally in a staggered manner over 12 months via the STP route i.e., Rs 41,667 per month from a Liquid Fund with a current yield of approximately 3.25% p.a. to an equity-oriented fund. Assuming a return of 10% p.a. from the equity–oriented fund, your amount of Rs 5 lakh deployed would grow to Rs 5.16 lakh at the end of the 12-month tenure and the money in equities thereafter would continue to grow as long as you stay invested.

Conversely, say you are closer to the goal date or you want to change your asset allocation basis your life cycle or you are closer to your retirement then you may want to shift your corpus to relatively safer assets from equity investments. You can do this too by using the STP route. In this case, the money can be moved from your equity fund to the debt fund over a period of time. This will ensure that you don’t have to withdraw your entire corpus at one go while preserving part of your capital via debt funds and participate in any further growth potential since a part of your corpus remains invested in equities for some time.

The SIP route

Another way to stagger your investments is through the SIP route. Do not stop your active SIPs during volatile market periods. Using SIPs you can invest a fixed amount monthly in a mutual fund of your choice. This too is automated and the money is invested directly from your bank account into the mutual fund.

Say you need Rs 15 lakh for your child’s future education 7 years from now. To achieve this goal, you would need to start a monthly SIP of approximately Rs 12,400 in an equity-oriented fund, assuming an annualised return of 10%.

[Also Read: Which investment strategy should you follow for your equity investments?]

The advantage of systematic investing is that it enables you to reap the benefits of Rupee Cost Averaging and shields your investment from market volatility.

Since fixed sums are invested at regular intervals, you buy more units when the markets are down and the NAV is low; and lesser units when the markets are up and the NAV is high.

Since this happens automatically, you don’t have to worry about timing the market and in turn the market volatility. Thus, STP and SIP provide an opportunity to lower the average purchase cost of units and help investors gain when the markets recover in due course.

Keep in mind that your portfolio should have a mix of assets across market capitalisation and investment styles, based on your investment time horizon and risk appetite. This is essential to ensure diversification and mitigate any potential risk from a sudden change in the market’s direction.

To select a suitable mutual fund scheme within each of these categories, click here.

(2) Review and rebalance your investments – Asset allocation is the fundamental principle of investing. Hence, just because equities are in an exuberant phase and there may be chances of making quick gains, avoid going gung-ho on equities. Similarly, if there is a market correction, i.e., if the market falls sharply, there is no need to panic and exit your equity investments.

Keep in mind, that if the market volatility increases, you may be caught unprepared and may end up eroding wealth. Thus, skewing your portfolio to equities, or for that matter, towards any single asset class, is not a wise approach. Instead, diversify it across asset classes. A sensibly drawn asset allocation would serve as a strategy in itself and help in several ways, such as:

  • Diversifying the portfolio
  • Minimising portfolio risk
  • Optimising portfolio returns
  • Aligning investments as per your risk profile and financial goals
  • Making timing the market irrelevant and addressing your liquidity needs

When you rebalance and review your portfolio suitably, you also get the opportunity to cull out underperformers and replace them with better alternatives, potentially improve the risk-returns and assess if your investments are on track to achieve the envisioned financial goals. But make sure you evaluate the fundamentals and give the investment sufficient time to grow.

(3) Diversify across asset classes - To address short-term goals like an emergency fund and capital preservation, it makes sense to park some money in fixed income instruments such as a bank Fixed Deposit and certain small saving schemes for secure and steady returns. You may also consider investing in debt mutual funds basis your risk profile and investment horizon.

You may also consider investing in gold in your portfolio. The precious metal has displayed its trait of being an effective portfolio diversifier, a hedge, and commanded a store of value amid uncertain times. For instance, in the calendar year 2020, gold gained approximately 28% according to MCX (Multi Commodity Stock Exchange of India) spot market price. It makes sense to allocate around 5-10% of your entire portfolio to gold via gold ETFs, gold saving funds and/or Sovereign Gold Bonds (SGBs) and hold it with a long-term view.

Remember, wealth creation is a journey; so manage the twists and turns that come your way. There would be a great deal of volatility on the way and therefore you need to approach it prudently with a sensible strategy.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision