The thing that snaps first in the mind of investors, whenever they thinks about equity investment is “Market Volatility”. The statistical measure which is used to know either “the tendency of the market or of financial securities going upwards or downwards” within a short period, is known as market volatility. It is usually measured by the standard deviation of the return of an investment.

Many investors look at volatility as a negative sign in the stock market. This is one of the main thing that hold investors from investing in equity mutual funds. This, however, is unappreciated, as volatility is in the nature of the stock market. 

Investors who do not have any risk appetite, avoid investing in equity funds. Volatility in these funds is unescapable. An equity fund which may have provided good returns in the past years can suffer from a deprivation in the coming years. Thus, it important for investors to understand volatility, and know how to treat it.          

What is market volatility?

The degree of uncertainties that are associated with the investments made in the stock market such as “Changes in the Price of financial Securities or Stock” is known as market volatility.

A highly volatile market suggests that the prices of the stock or securities change intensely i.e. they are either too high or too low.  Whereas, low volatility indicates stability in the prices of stock.

How is market volatility caused?

Global factors

Now, the economy has become globally interconnected. Inventors are now able to invest in stock markets of different nations. An event in some other part of the world can affect the home market tremendously. For example, Coronavirus was originated in China but interrupted the economy of different nations.  Even the Indian market was severely disturbed due to the virus. On 20th January 2020, S&P, BSE, and SENSEX went from 42273 points to 29894 points by 8th April 2020.

Some Changes In The National Economic Policy

The stock markets are highly sensitive. Any development or changes in the economic policy can lead to changes in the stock market. Sometimes even a stock market can have a severe misbalance on the economic policies of few nations. Sometimes, even a statement or a word can lead to major economic changes in the nation. For example, a member of NITI Ayog made a very consenting statement about a change in the policy of auto manufacturers.  Even though this was just a statement and no such policy was obliged, still this statement managed to wipe 5% of the market capitalization of auto manufacturers. The market can also grow if there is any positive economic policy. For example, in 2012, there was an increase in SENSEX with up to 6%. This happened because there were few positive economic measures such as “Allowance Given to Foreign Direct Index (FDI) In Multi-Brand Retail, Increasing the Limit of FDI in Insurance, And by Giving a Bailout Package to Those States Which were Struggling with Electricity.”

Industry-Specific Factors

Any recent development or changes in the policy in the industrial sector can also be held responsible to influence the stock market. It often happens that the stock prices of the companies that compete in the same sector have the same prices and very rarely do these prices have large margins.

Company-Specific Sectors

Not all the factors are specific to the industry, some factors are also company-specific. These factors can also change the shape of the market.

For example, in case the workers of the company get into a fight. Now, workers are the leaders of the market and can easily influence the market changes. Thus, this event initiated by them can bring down the market share of the company.

After the above discussion on various factors, it is clear that these factors are not under the influence of any investor or investment company. Thus, market volatility cannot be controlled by anyone. It is unavoidable. However, if compared in the long run, market volatility can be treated in the right sense.  If an investor gets the idea of the correct strategy and investment schemes, then he/she can take advantage of market volatility. Still, if investors do not want to take any risk, they can manage market volatility through investment in SIPs.

How SIPs Help Investors Take Advantage Of Market Volatility?

Most of the investors treat volatility as an enemy. But, these investors will be stunned to know that investing through SIPs can make volatility their friend. This technique is used by all those investors who want to take advantage of market volatility.

But the question then arises, is how do these inventors make smart investments in the volatile market through SIP investment?

The answer to this can be given through the “Rupee Cost Averaging” technique. This is the assistance that is given by SIP investors to equity mutual fund investors who have long-term investment goals. This technique helps the inclination of market downwards and makes volatility in your favour.

This is done through investment in SIPs. SIPs allow investors to invest a certain amount of money every month on a specific date. Now, based on the investment amount done by the investor along with calculating the NAV of the day, certain units of fund are allotted to the investors. The unit of the fund depends on the market.

Now in case, if the market inclination is downwards, the NAV of the fund which the investors invested in, comes down due to which the investors receive more units of fund on the day of their SIP installment. Similarly, if the market is performing in a really good shape, then the investors will receive fewer units of fund due to the increase in NAV.  Thus, in case of market volatility, the average cost of investment comes down which in turn can push the investor’s overall returns.

For example, if an investor invests in an SIP of Rs.2000 every month in a volatile market. Then, the following units will be received by the investor:

MonthInvestment AmountPer Unit Price (NAV)Units Received
January200020100
February200018111.1
March20002290.9
April20002195.2
May200017117.6
June200019105.2
July20002483.3
Total14,000 703.3

As visible in the table, the investor is getting more units when the market is correct due to which the average per-unit cost of investors at the end of July would be 19.9. But, instead of investing in SIPs, if the investor would have made a lump-sum investment in the month of March or April, then he/she would have made higher per-unit cost, therefore, the investor would have received lower returns.

Conclusion

For many years, investors have been told to treat market volatility as something negative for the investment. But now, investors understand all the sides of the investment and then make an investment. They have gained proper knowledge of the above mentioned schemes. Thus, they now treat volatility as an acquaintance and not as an opponent. Market volatility does not hold much importance in the long run, it is certain. Thus, investing through SIPs and gaining the proper market knowledge can help investors to make the correct investment choices. Not many investors have any risk appetite, they prefer to invest in schemes which offer good returns with low risk. Thus, they are advised to invest through SIPs in case of high market volatility.

We suggest that you take help and advice from professionals. Take advise of WealthBucket. We make investing easy and responsibly manage your hard-earned money. Out of the many services on offer, a few are Equity Mutual FundsDebt Mutual FundsIncome Funds, etc.

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