No one can predict the movement of the stock markets with 100% accuracy. However, it is generally expected that the Indian stock market will grow over time, so long-term investing in mutual funds is always beneficial. For example, consider the devastating hit on the Indian stock market during the COVID-19 outbreak, when NIFTY 50 fell almost 23% in March 2020. Despite this huge setback, the NIFTY 50 was higher at the end of 2020 than at the beginning of 2020.  

Long-term investors do not quite have to worry about fluctuations even when the market is highly volatile. Smart investors usually look at long investment horizons while investing in mutual funds. Most importantly, it’s essential to avoid panic selling during turbulent times. Although temporary swings may be disturbing, the past provides evidence that markets can recover and grow in the long term. In this article, we’ll discuss detailed steps and guidelines to enable you to manage your mutual funds sensibly in the ups and downs of the market. This way, you can remain committed to your long-term financial objectives and safeguard your investments successfully.

What is Market Volatility?

Market volatility is the degree of fluctuations in the stock market within a certain period of time. High market volatility indicates the market value fluctuates drastically, whereas low market volatility indicates that the market is stable. In short, we can say that the market is volatile when it starts moving with sudden fluctuations. 

Volatility, usually measured using standard deviation, indicates how risky the climb is for investors. But while high volatility comes with risks and uncertainties, it doesn’t always mean that your mutual funds will take a hit. In fact, how much your portfolio will be affected usually depends on the types of mutual funds you choose to invest in and the decisions you take during high-volatility situations.

What Makes the Market Volatile

There are several factors that make the market volatile. Some of the major ones are:

  • Performance and Sentiment Impacts: Individual stocks’ financial performance largely determines market volatility. Good performance rallies buyers, pushing prices higher, whereas bad performance inspires selling, and prices plummet sharply. In addition to this, investor sentiment, conditioned by good or bad news concerning a company, is also a determining factor. Good news sends stock prices higher, whereas bad news sends them lower, each responsible for instant and drastic fluctuations in the market.
  • Government Policies: A government has an important role in determining the performance of the market. Lower interest charges usually drive growth at a quicker company pace, which increases stock prices, while increased interest charges slow down growth and cause stock prices to fall.
  • Geopolitical Events: The Indian stock market is influenced not just by domestic factors but also by global events, as many Indian companies rely heavily on the import and export of goods. Hence, a major geopolitical event like political or trade conflicts, war, election results, etc., hugely affects the capital market. Additionally, foreign investors’ decisions are influenced by the economic and political conditions in their own countries.
  • Natural Events: Natural events, such as the COVID-19 pandemic, earthquakes, floods, etc., in major trade areas hinder their economic growth. This hindrance also affects the Indian stock market as well as the global markets since everything is connected through mutually beneficial business deals.

How Market Volatility Affects Mutual Funds

When the market is highly volatile, the value of assets like stocks, bonds, and equity behaves erratically. Since mutual funds invest in these assets, their Net Asset Value or NAV too fluctuate right along with the assets. For example, take the case of mutual funds that invest in equities.

These mutual funds primarily invest in stocks, which can rise or fall sharply depending on economic or geopolitical events, market sentiments, individual stocks’ performance, and many other factors. The NAV of such mutual funds is remarkably affected by the constant shift in equity value.

Risk Mitigation and Mutual Fund Management During High Volatility Periods

It may seem plausible to sell your funds or take hasty decisions out of worry during high volatility periods. But that’s not a good idea, to say the least. High volatility periods are risky, yes, but they are also full of opportunities. As any seasoned investor knows, riding out such periods can lead to high returns. So, how should you manage your mutual funds to mitigate risks and ensure high returns when the capital market is highly volatile?

  1. Long-term Investments: You should always think of long-term goals while investing in mutual funds. You should keep in mind that the market will recover and grow with time. As was mentioned previously, the COVID-19 pandemic-induced market crash and countrywide lockdown triggered mass hysteria among investors. Nevertheless, after a bearish beginning to 2025, the NIFTY 50 is currently close to twice what it was worth at the start of 2020. Hence, instead of investing, keep short-term investment goals in mind, set definite long-term goals like buying a car or a house, making foreign trips, retirement plans, etc., and wait patiently.
  1. Asset Allocation: When working on asset allocation, remember to diversify your portfolio. This method can offset the negative effects on your portfolio if one sector of the stock market performs poorly. Diversification of your portfolio is an excellent way of risk mitigation. 
  1. Avoid Panic Selling: Another vital thing you must remember is that market volatility is unavoidable. While it is perfectly natural to feel nervous in times of downturns, allowing emotions to control your finances can be more damaging than beneficial. The high volatility of stock markets creates panic among many investors, especially because they expect that their investments will grow positively and consistently. However, you should always remain calm and focus on your long-term financial goals. So, do not panic sell and do not stop your SIP. Just remain calm and wait patiently.
  1. Periodic Review of Portfolio and Rebalancing: Even in wildly volatile markets, you must go over your mutual fund portfolio from time to time. Ask yourself, does it still match your goals and risk tolerance? With time, the direction of the markets can alter your initial asset mix, which can put you at risk more than you would desire. Rebalancing, i.e. shifting your investments, can keep things in line. Transferring some of it to more stable aspects, such as bonds, will put you in a position to absorb market declines and maintain your risk level in check.
  1. Invest in Good Quality Mutual Funds: In turbulent times, discretion in how and where you invest is more crucial; good-performing funds can be a blessing. Look for funds that have a history of stable performance, good governance, and prudent risk-taking. These funds are typically handled by experienced managers who know their way around tough markets,

A Volatile Market: Boon or Bane?

Although the risks associated with a volatile market are evident, there are some advantages involved as well. They are:

  1. Lowering of Net Asset Value (NAV): When the market experiences volatility, it typically causes the Net Asset Value (NAV) of mutual funds, especially equity mutual funds, to decline. This means you can buy these funds at a much lower rate than usual. When the market recovers, the value of the underlying assets will surge, and the NAV of your mutual funds will grow right with it.
  1. Cost Averaging with SIPs: The Systematic Investment Plan (SIP) eases the burden on investors in several ways. In a highly volatile market, the fixed amount of SIPs lowers the average buying price, which ultimately gives more returns when the market recovers.

Conclusion

Regardless of how well you think through and prepare, capital markets will always have phases of volatility. Although the volatility that results is fraught with risk as well as opportunity, the secret to successfully riding it out is to remain calm, stay focused on what you are doing, have specific financial objectives, and keep emotions firmly under control when making investment choices.

FAQs

1. How do mutual funds react to market volatility?

Market volatility can lead to fluctuations in the values of mutual fund units (NAVs), especially if the fund is invested in stocks affected by economic and geopolitical events.

2. Should I stop SIPs during periods of volatility?

No. If you stop your SIP during periods of volatility, you lose out on rupee cost averaging and the next time you resume the SIP, you’ll likely be buying at a higher NAV.

3. What is the best way to manage mutual funds in volatile markets?

You should stick to your long-term goals, you should not sell in a panic, and you must review your portfolio periodically to make sure it is still aligned with your risk tolerance.

4. Does diversification protect me during volatile markets?

Yes. Diversifying your mutual fund investments across asset classes and sectors reduces risk, which can help offset volatility in your overall portfolio.

5. Can I use volatility to buy mutual funds at a lower NAV?

Yes. Markets are often volatile, which pushes NAVs down and enables you to accumulate more units at a lower cost, which is beneficial when the market improves.