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3 Reasons Why Volatility Can Be Good For Your Financial Health - Outside View by PersonalFN

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3 Reasons Why Volatility Can Be Good For Your Financial Health
Apr 8, 2017

Mehek, an IT professional is naive and new to the financial world. However, she is very particular about maintaining her financial health. She is willing to invest into equity and debt instruments. But, she fears the current volatile market conditions.

Should volatility always make you fearful? Isn't volatility good at times?

This article will clear all your doubts about volatility and the impact it holds on your portfolio.

First, let's understand volatility...

You would have heard this word often and in its basic understanding, it is the rapid deviation from one point to another.

Technically, it is the amount of risk or uncertainty about the change in a security's value during certain time period.

Therefore, higher volatility means a security's value can drastically change over short time period. This fluctuation can move in either direction - up or down. On the other hand, lower volatility indicates the security is comparatively more sound and stable, and its price would not fluctuate dramatically.

Surely a parallel thought is running in your mind that less volatility is the best! But that's not the whole truth. Volatility is sometimes good! If invested prudently, volatile equities have the potential to outperform most other asset classes.

If you don't have the time and expertise required to invest in stocks, investing via diversified equity-oriented mutual fund schemes is a good alternative. These funds invest your hard-earned money in a variety of stocks - thereby reducing the risk involved in single stock investing - and your money is professionally managed. Plus, it offers innovative services and liquidity isn't a problem.

Now, let us look at how volatility is good for your financial health...

  1. Encourages staggered investing

    Volatility often encourages you to invest in a staggered manner. You would refrain from deploying your entire invisible surplus at one go.

    With the help Systematic Investment Plan (SIPs), which is nothing but a mode of investing in mutual funds, systematic and regular investing is facilitated. Moreover, it's lighter on the wallet, a effective medium for goal planning, and allows rupee-cost averaging while it powers your portfolio with the benefit of compounding. Also, the SIP route enables you to even-out the volatility of the equity markets effectively.

    The method of investing is similar to your investment in a recurring deposit with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit. Hence your investments in mutual funds are subject to market risk.

    But PersonalFN, through is mutual fund research service, 'FundSelect' brings to you: The 6 Ultimate Secrets to Beating the Market By A Whopping 70%! It's a time tested way to beat the market, and we highly recommend that you try this service which comes with a 30-days full money back guarantee. No hassle, no quibble.

  2. Facilitates rupee-cost averaging

    To absorb the shocks of the volatile equity markets well, SIP works better as opposed to one-time investing. This is because of rupee-cost averaging. Under rupee-cost averaging, you typically buy more mutual fund units when prices are low, and similarly buy fewer mutual units when prices are high. This infuses good discipline since it induces you to commit cash at market lows, when other investors around you are wary and exiting the market. It also enables you to lower the average cost of your investments.

  3. Potentially facilitates compounding

    If you are the one who shudders with the wild swings of the Indian equity markets - like at present - but have a vision for long-term investing, then volatile market conditions can sometimes work in your favour, especially when the SIP mode of investing is opted for.Timing the markets can be disastrous to your objective of wealth creation, as a trader is only good until his last trade. Very often many of you burn your fingers in the equity markets and conclude that equity is either not your cup of tea or cannot create wealth for you. However, several studies have repeatedly highlighted the ability of equities to outperform other asset classes (debt, gold, even real estate) over the long-term (at least 5 years), and also as an effective counter to inflation.

    So, now one may ask if equities are such a great thing, why are so many investors complaining. Well, it's because they either didn't have various resources for investing in stocks or mutual funds, or they wore a traders' hat.

    We believe, by being disciplined and focused you can compound your wealth better even during volatile market conditions if you invest in a staggered manner and/or through SIPs in mutual fund schemes from fund houses that follow strong investment processes and systems and those who've proved to have a consistent track record.

To sum-up...

PersonalFN is of the view that broader markets are prone to increased volatility due to stressed domestic and global economic conditions. Investing in mutual funds through SIPs will not only inculcate a regular saving habit, it will also enable your financial dreams to come true - buying a dream house, buying a car, providing good education to children, getting them married well, or even retiring.

For those who want to park money only for short term, say for less than 6 months, SIPs may not provide any benefit. Moreover, even those who have a little longer time horizon of about 1 year may also not get any advantage.

Having said this PersonalFN believes that, those who have a longer time horizon of around 2-3 years may take advantage of volatility in markets and invest through SIP route. But before hopping on a volatile rollercoaster ride, check your financial health, circumstances, the financial goals you're addressing, and your risk profile, age, among a host of other factors in the interest of your financial wellbeing.

Don't attempt to time the market; this can be hazardous to your wealth and health. Stay calm during the current fluctuations in market. If you need superlative guidance and handholding in the path to wealth creation, don't hesitate to seek the services of a Certified Financial Guardian, who is a mark of trust and respect.

Keep calm and work towards your financial freedom.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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