Understanding Market Volatility and How to Navigate It
What exactly is volatility, and how can investors manage it effectively? Let’s break it down.
Mar 2025
3 mins read
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Market volatility is a term that often sends shivers down the spines of investors, especially during periods of uncertainty. But what exactly is volatility, and how can investors manage it effectively? Let’s break it down.
What Is Market Volatility?
Market volatility refers to the fluctuations in the prices of listed equity shares. These fluctuations are driven by the daily supply and demand dynamics of the market or individual stocks. Volatility can be triggered by macro factors, such as global economic conditions, geopolitical tensions, or changes in leadership in major economies. It can also stem from micro factors, like company-specific news or sectoral developments.
For instance, recent market volatility has been influenced by macro events like high market valuations, leadership changes in the world’s largest economy, and anticipation around union budgets. Geopolitical tensions have also played a role in shaping market sentiment. While these factors can cause short-term price swings, volatility tends to smooth out over longer periods, aligning with stock earnings and the overall state of the economy.
A useful tool to gauge market volatility is the India VIX Index, which reflects investor expectations of near-term market volatility. A higher India VIX value indicates greater expected volatility, while a lower value suggests stability.
Is Volatility Permanent or Temporary?
Volatility is both temporary and permanent in the market. The degree of fluctuation varies, but it is an inherent part of equity investing. While it can cause anxiety and potentially harm returns, there are ways to mitigate its impact on your portfolio.
How to Manage Volatility
1. Diversify Your Portfolio: Diversification is one of the most effective ways to cushion against volatility. This doesn’t require complex models; a basic understanding of your financial goals and timelines is enough. Diversify across investment styles, market caps, sectors, and asset classes with low correlation to each other. For example, combining equities with bonds, gold, and international equity can help balance your portfolio.
2. Stay Invested for the Long Term: Trying to time the market by exiting during volatile periods and re-entering later is rarely successful. For instance, during the COVID-19 pandemic in March 2020, many investors exited the market in panic, only to miss a significant rally in April. Staying invested allows you to benefit from market recoveries.
3. Continue SIPs During Volatility: Stopping systematic investment plans (SIPs) during downturns can hinder your long-term goals. In fact, market corrections present an opportunity to buy more units at lower prices, enhancing your portfolio’s growth potential.
4. Focus on Financial Goals: Instead of reacting to market movements, align your investments with your financial goals. Proper asset allocation ensures that your portfolio balances risk and return, helping you achieve objectives like retirement, education, or buying a home.
5. Avoid Frequent Trading: Frequent buying and selling can erode returns. Studies show that missing even the best 10 days in the market can significantly reduce your compounded annual growth rate (CAGR). Staying invested is key to long-term success.
Key Takeaways
- Volatility is a natural part of equity investing and can help build long-term portfolios.
- Diversification across asset classes reduces downside risk.
- Avoid timing the market and stay invested to benefit from recoveries.
- Focus on your financial goals rather than short-term market fluctuations.
By understanding and managing volatility, investors can navigate market uncertainties and stay on track to achieve their financial objectives.
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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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