How mutual funds are impacted with volatility?

How does the volatility mutual funds proposition work? How are your mutual fund investments actually affected by market volatility? Volatility is a term that basically means downward and upward shifts/movements in interest rates across the market over which individual investors do not have any control. It is differentiated from risk which refers to chances of losses or uncertainties regarding financial returns. Experts usually measure market volatility on the basis of the difference that exists between the minimum and maximum returns. Higher accuracy can be expected when analysts tap into the Standard Deviation principle, i.e. how much the index varies from its latent average on the downward and upward positions. 

The first thing to remember in the COVID-19 pandemic, when market volatility is rampant, is that the younger you are as an investor in mutual funds, the lower your chance of getting affected with volatility. You can always zero in on long term objectives and bypass the short term and temporary fluctuations in the market at present. However, if you have short term goals and impending returns expected or are nearing your retirement age, you will be sizably affected by volatility. 

What experts advise

There are several things that you should remember when it comes to tackling volatility in the market in the present scenario. Firstly, experts recommend that if you already have a steady flow of income/cash and are looking at goals from a long-term perspective, you should not withdraw or pull out your investment in mutual funds. This should be strictly maintained irrespective of prevailing short term volatility across both debt and equity funds. Rather, smaller investors can consider switching to SIPs or systematic investment plans for combating risks in the medium term amidst the ongoing pandemic according to experts. 

Volatility usually impacts equity mutual fund investments more than other peers in the market. Investors should carefully choose their funds, i.e. whether they should opt for small or medium cap funds which are highly volatile or go for large cap funds with comparatively lesser volatility. Those who are more conservative in terms of their risk appetite can consider choosing diversified equity portfolios as compared to risk tolerant investors who are more tilted towards small cap funds. Whenever there is a market rally, investors accelerate SIPs for gaining from such scenarios. However, they end up panicking and lowering stakes whenever markets witness a decline. They end up buying at higher positions and selling at lower ones. For gaining from volatility, you should always operate with an outlook that emphasizes on finding new opportunities. 

Here are some tips that you should consider: 

• Follow valuations in the market and relook decisions regarding allocation of assets, rebalancing and diversification in case of volatility. 
• Returns may temporarily vary and turn negative and positive, depending on the timing of buying and selling shares/mutual fund units. 
• Ignore volatility in the short term and stay committed towards your investment. Build up a diversified portfolio that helps you lower risks of volatility. 
• Make investments regularly through SIPs for spreading out risks and benefiting from averaging. 
• Volatility may give you opportunities to invest in reputed companies that will recover and perform better in the future. Always do your homework before investing in a company with attractively discounted values. 
• Spot emerging funds in sectors that are doing well and pivot towards the same in consultation with your fund manager/advisor. 

Spotting new opportunities-Pharma sector on a bull run? 

The likes of the ICICI Prudential Pharma fund and other similar pharmaceutical sector based funds have been rallying considerably of late. This may be an opportunity for you to combat volatility in the market and invest in a sector that looks set to keep growing amidst the current pandemic. The Nifty Pharma Index leaped up by a whopping 42% between April-June, 2020 in comparison to a fall of 10.8% in the January-March quarter of the last financial year. The Nifty 50 Index went up by 25% in the first quarter of FY2020-21. 

Stocks like Aurobindo Pharma (16% gains), IPCA Laboratories (8.3% gains), Cadila Healthcare (9.2% gains) and Sun Pharmaceuticals (5% gains) are doing well. Pharma stocks are consistently delivering steady returns while other sectors are bearing the brunt of the current global crisis. Stocks like Aurobindo Pharma have even delivered returns of 195% ever since the detection of the first ever coronavirus case in the country. Sun Pharma, Cipla, Dr. Reddy’s Laboratories, Torrent Pharmaceuticals, Cadila Healthcare and Lupin have seen a jump of 50% in returns ever since the 30^th of January, 2020, when the first coronavirus case was flagged. 

This is heartening for investors in the sector, particularly at a time when the Sensex has plunged by close to 12%. Pharma has been comparatively strong and resilient as opposed to several business sectors in the Indian economy and while growth will be moderately impacted owing to lower footfalls of patients countrywide, this will be recovered subsequently upon normalization of the overall situation as per experts. The business has an essential nature/type and disruptions relating to supply, manufacturing and distribution have been largely ironed out after some hiccups in the initial stages as believed by industry experts. They recommend investments in mutual funds chiefly focusing on purchasing pharma company stocks that have been performing consistently over the first half of the year. 

The trend looks set to continue well into the end of the year and the next as per reports. Coming back to market volatility, do not panic or lose hope. Buckle up, try and diversify your portfolio and stay committed to your investments. Remember that there is always a silver lining beyond the clouds. You just have to be patient and see this through!