Investing through Mutual Funds when the stock market is volatile

The fact that the stock market doesn’t have a magic wand to make you rich in a jiffy is a no brainer. Yet instances of investors indulging into misadventures with the market aren’t uncommon. Such incidents usually peak when the market is volatile. Therefore, experts have always preferred the ‘stay invested’ approach as the fundamental mantra to cut through its sentimental upheavals and make the most its movements.

While stock prices of good companies tend to go up in line with the growth of profits of the company over long periods of time, in the short term, the stock prices would remain volatile. In the words of Benjamin Graham, “Stock markets are like voting machines in the short term, but are like weighing machines in the long run.”

While some investors have come to understand this of late, many still carry the fear that their investment may lose money. Such fear is understandable, since it arises due to the inherent volatility in the market prices of stocks, often without any change in the fundamentals of the company in question.

While pundits keep talking about the long term relation between the fundamentals of the business and the price of the stock, such a relationship is not visible in the short term. This causes fear.

The fear leads to irrational behavior and often investors get out of their investments exactly when they should not.

So, what is the way? Should investors invest in stock markets at all? Well, the answer is: “It depends”. The investors in the need to earn return on their investments higher than inflation, cannot avoid investing in stock markets. Equity is the only asset class that has the potential to beat inflation over long periods of time. However, there is always the short term volatility involved.

The way to invest in stock markets is to invest in a diversified portfolio of carefully chosen stocks. This requires tremendous amount of work – choosing good quality stocks requires a lot of knowledge, understanding and hard work. It also involves a lot of time. Many investors, busy in their jobs or professions are not experts at stock selection. Even those, who are, may not have enough time for the activity.

In such a case, equity mutual funds offer the best way to get exposure to a diversified portfolio of stocks, chosen by a professional fund management team.

The hard work of investment research, as well as all the associated accounting and administration work is carried out by the asset management firm. The investment managers employed with the asset management company are expert professionals in the business of investing. They also have requisite qualifications and experience. Armed with these qualities and being able to devote their full time on managing money, these professionals are in a position to do a better job than majority of individual investors.

Add to that the strict regulations imposed by the securities market regulator – SEBI. These characteristics of mutual funds make ensure that the investors get a good investing experience, irrespective of the inherent volatility of equity markets, if they understand and invest properly.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.