Market Volatility: An Opportunity or a Threat
2018 was a year full of volatility for the equity market, and a year of negativity for the equity mutual funds. Even the schemes that were giving really high returns till the mid of January 2018, started showing a negative trend and by the time they reached October, the conditions were extremely bad as the negativity of more than 10% was observed even among the top schemes of the mutual fund market.
Now, one common query that worried mutual fund investors throughout the year was, “Should I continue my investment or redeem the amount?”. So, today let’s discuss if the market volatility is an opportunity to invest or a time to exit.
What Made the Returns Go Down?
As you may be aware of the way mutual fund schemes work and are valued, and for those who are not, let’s take a quick look. Mutual fund schemes have a pool of investments gathered from a number of investors sharing a common interest, which are then invested by the fund manager into different instruments, the profit generated from which is distributed among investors, based on their investments in the particular fund or funds. Now, the NAV (Net Asset Value) of a scheme is a price for which you can buy a single unit of a scheme. This price is calculated by dividing the total assets under management with the total number of units distributed.
So, as you know that all the assets are invested in some instruments, which means the behavior of NAV is totally dependent on the performance of these instruments. If the valuations of these instruments go up, the NAV will go up and if the valuations of these instruments go down, NAV will go down too. In the past 1 year, most of the equity instruments were underperforming due to the rise of various negative sentiments in the market. As the valuations of these instruments were going down continuously, so was the NAV of mutual fund scheme. The more the NAV went down, the more the negativity in returns increased. But, don’t worry as this has created an opportunity for you as an investor.
How Is Returns Going Down An Opportunity?
This would have been the first question that popped into your mind after reading the last line. Well, let’s understand this with the help of a simple example. When the price of gold goes down, do you start selling it or do you plan on buying it more? The right answer is you buy more. Same is the case here. When NAV of a good scheme goes down, it doesn’t mean that it will be down for the rest of the life and you don’t actually face any loss until any purchase is made.
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What Should Be Done?
Take full advantage of this opportunity that has come in the form of the market volatility. Just like you buy more gold when the price goes down, here to buy some extra units to experience the benefit of the market volatility. You must have heard about the additional purchase that you can make in mutual funds. So, if you have an ongoing SIP investment, then this is the right time to make an additional purchase, as you will be able to buy more units at lower prices. There are 2 major benefits of this and they are as follows:
Rupee Cost Averaging- This is one of the best features of mutual funds and its advantage can be best enjoyed when the NAV of a scheme drops drastically. Let’s understand this with a simple example which shows how rupee cost averaging works on SIP of Rs. 2000/ month
| Month | NAV | Units Added |
|---|---|---|
| January | 55 | 36.36 |
| February | 54 | 37.03 |
| March | 53 | 37.73 |
| April | 52 | 38.46 |
| May | 51 | 39.21 |
| June | 50 | 40 |
| July | 49 | 40.81 |
| August | 48 | 41.66 |
| September | 47 | 42.55 |
| October | 46 | 43.47 |
| November | 45 | 44.44 |
| December | 44 | 45.45 |
| Total Months- 12 | Avg. NAV= Rs 49.5 | Total Units= 456.27 |
Here, you can see that by making regular investments even when the NAV is decreasing regularly, you can bring down the average NAV considerably down. Now, let’s say you make an additional purchase when the NAV is Rs. 44, then you can imagine how much lower the average NAV can be bought.
Advantage of Recovery- As the schemes will enter a recovery phase, the profit you will make will be really high. The reason behind that is the accumulation of mutual fund units at lower NAV. So, let’s say in the next 1 year the scheme reaches the value that it was at the start of the year, then you can yourself imagine the growth you will get.
At Last
With help of the above write up, you can understand how volatile markets are an opportunity and not a threat. So, don’t panic and continue with your investments to enjoy the best benefits from mutual fund investments. If you are a new investor, then this is the right time to enter the market, as you will be able to enter at much lower levels, enjoying a better growth in the long term.
Must Read: Top Mutual Funds to Invest in December 2018
Recommended Watch: Is it the Right Time to Invest in Mutual Funds?
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