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Volatility – In markets or in our minds?

Volatility is a word that sends shivers down the spines of most investors! But veteran investors do not see market volatility as a foe; rather, they love volatility.

Volatility in investments means the rate of change or fluctuations in the price of an asset over a period of time. Volatility is a function of various factors: economic outlook, interest rate, geo-political situations, climate or calamity, war, terrorism, macro environment, supply and demand levels, performance and business outlook at micro level, among other factors. However, many of these factors are not permanent in nature and will typically recede in a few months or years. Also, these macro and micro factors are hardly within the control of an investor.

How does a typical investor behave? When markets are rising, investors tend to commit more and more money into the stock market. Seeing other people around your investing results in more and more people investing in stock markets or mutual funds. The higher the market rises, the more monies is invested. When the market starts to fall, people start to exit their investments and the resulting contagion effect brings down the investment value. This is what happened in March 2020 during the first lockdown. Many investors exited their investments with bigger losses, while others preferred to stay on the fence until the markets recovered. Few smart investors, however, made the most of the opportunity and invested their monies to make multi-bagger returns. Data suggests that more demat accounts and mutual fund folios were created much later, from mid-2021 onwards; they lost great upside potential due to the volatility in their minds, not that of the market.

To make my point clear, take a look at the Sensex chart since 1991. The chart plots all major events over the past 31 years. You can see that all the crises were bigger than the previous ones, and the resulting market falls during these times were also bigger. History has proven also that the market did create new highs after every major fall. The maximum recovery time that the market took to create fresh highs was 6 – 36 months. This clearly shows that market volatility is temporary but growth is permanent.

ET Spotlight

Equity investing is considered a speculative asset by investors; as such, they tend to romance equities rather than marrying them. For example, when investing in equities or mutual funds, investors typically decide the exit date or target price in mind. But do investors ever keep a target price or exit date in mind when investing in real estate or gold? The answer is almost always negative. That’s the main reason why you make better returns when investing in real estate and gold. Property and Gold prices do fluctuate but you rarely check that as frequently as you would your equity investments. That’s simply because you didn’t fix a target price or time of exit at the time of investing in these non equity assets. So, is it so difficult to marry an equity mutual fund?

Many research over the years have shown that stock market indices have outperformed Bonds, real estate, and Gold across various times frames of 10 years plus. While the performance of indexes have beaten that of bonds, insurance, real estate, and gold, Mutual Funds have been able to beat even their respective indexes over the same period of time, with an impressive track record of over 25 years.

So when there is volatility in markets, remember to have a stable long-term investor’s mindset and consider investing more during such times. Your investments will only grow with time.

Views are personal: The author, Bhavesh Damania is the Founder of Wisdom Edge Investments

Disclaimer: The views expressed are of the author and are personal. TAML may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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