The current bull run is marred with ample volatility due to global liquidity, scams, inflation, interest rates, fears of war, increased FII pullouts and economic worries around the globe. Some aggressive investors turn market volatility in their favor by churning quick profits.
However, such wild price movements could lead to heavy losses in an investor's portfolio. Are mutual funds affected by market volatility? Since the underlying investments of mutual funds include picks from stock markets, the volatility of the markets transcends up to these funds. Irrespective of the strategies employed by fund managers, mutual funds cannot remain totally immune to market fluctuations.
The extent of volatility is determined by the extent of fund's exposure to equity.
Market volatility can be beaten by owning actively managed mutual funds or non-index mutual funds. The fund manager identifies stocks that are susceptible to negative market swings and adopts strategy to minimize the impact of a fall. A more volatile fund is associated with larger risk, especially when you require money over a short term.
This is when a fund's volatility becomes critical.
It is true that past performance cannot accurately predict future returns. However, this data provides an insight into the fund's volatility. The standard deviation of a mutual fund is a measure of variation of returns across a period of time.
A fund's beta is another common measure of volatility. Here, beta compares a fund's performance to a benchmark, typically an index. The beta coefficient refers to the return that a stock or portfolio of stocks is expected to achieve in relation to the returns provided by the stock market as a whole. The closer a mutual fund's beta is to one, the less volatile it is. If the beta value is greater than one, it is more volatile.
To beat volatility, invest in mutual funds that have exhibited consistent growth over the years.
Here are a few investment options for the risk averse:
Balanced fund
Young investors who seek decent returns for moderate risk can explore balanced funds. These invest partly in equity and partly in debt instruments. While equity investments lend growth prospects to the portfolio, debt investments provide the much needed stability and capital preservation. Most balanced funds have equity to debt investments in the ratio of 65:35.
Debt mutual fund
For those investors who are close to their retirement years, assured of liquidity, capital preservation and regular flow of income are prime concerns. They usually aren't concerned in making quick profits by taking considerable risks. Debt mutual funds are not only less risky but also provide higher posttax returns than the traditional debt products.
Invested in fixed income instruments, debt mutual funds pass on interest income earned to investors in the form of dividend. These dividends are subjected to Dividend Distribution Tax and the same is withheld by the fund house before disbursement.
Systematic investment plan (SIP)
Investment discipline or systematic investing is key to building a long term robust portfolio. Instead of investing a lump sum, the investor can choose to invest in a particular mutual fund scheme on a periodic basis. He not only benefits from the power of compounding but also from Rupee Cost Averaging. This is the ideal investment vehicle for long term investors. Some fund houses offer SIP investments as low as Rs. 250 per installment, making it very attractive.
Fund houses are now providing more investment frequency options for investors - daily, weekly, monthly and others. A daily SIP takes advantage of intra-month swings in prices of stocks, which comprise that scheme's portfolio.
Monthly income plan (MIP)
Yet another option for investors with low risk appetite is MIPs. Funds in this category invest a small portion of around 15 percent to 25 percent of the portfolio in equity and the rest is pumped into debt and money market instruments. Investors must know that unlike what the name suggests, monthly income is not assured but is dependent on market performance.
Investors can get higher returns owing to the fund's equity exposure, compared to fixed deposits and pure debt funds. Medium or risk averse investors can invest in new hybrid products that have exposure to both equity and debt markets.
These hybrid funds have equity exposures varying from 15 percent to 50 percent and an investor can choose such schemes which are in line with their risk appetite. These plans offer a balance of sensible risk with growth potential.
Source: http://economictimes.indiatimes.com/features/financial-times/Invest-in-consistent-mutual-funds-to-beat-market-volatility/articleshow/7042076.cms?curpg=2
However, such wild price movements could lead to heavy losses in an investor's portfolio. Are mutual funds affected by market volatility? Since the underlying investments of mutual funds include picks from stock markets, the volatility of the markets transcends up to these funds. Irrespective of the strategies employed by fund managers, mutual funds cannot remain totally immune to market fluctuations.
The extent of volatility is determined by the extent of fund's exposure to equity.
Market volatility can be beaten by owning actively managed mutual funds or non-index mutual funds. The fund manager identifies stocks that are susceptible to negative market swings and adopts strategy to minimize the impact of a fall. A more volatile fund is associated with larger risk, especially when you require money over a short term.
This is when a fund's volatility becomes critical.
It is true that past performance cannot accurately predict future returns. However, this data provides an insight into the fund's volatility. The standard deviation of a mutual fund is a measure of variation of returns across a period of time.
A fund's beta is another common measure of volatility. Here, beta compares a fund's performance to a benchmark, typically an index. The beta coefficient refers to the return that a stock or portfolio of stocks is expected to achieve in relation to the returns provided by the stock market as a whole. The closer a mutual fund's beta is to one, the less volatile it is. If the beta value is greater than one, it is more volatile.
To beat volatility, invest in mutual funds that have exhibited consistent growth over the years.
Here are a few investment options for the risk averse:
Balanced fund
Young investors who seek decent returns for moderate risk can explore balanced funds. These invest partly in equity and partly in debt instruments. While equity investments lend growth prospects to the portfolio, debt investments provide the much needed stability and capital preservation. Most balanced funds have equity to debt investments in the ratio of 65:35.
Debt mutual fund
For those investors who are close to their retirement years, assured of liquidity, capital preservation and regular flow of income are prime concerns. They usually aren't concerned in making quick profits by taking considerable risks. Debt mutual funds are not only less risky but also provide higher posttax returns than the traditional debt products.
Invested in fixed income instruments, debt mutual funds pass on interest income earned to investors in the form of dividend. These dividends are subjected to Dividend Distribution Tax and the same is withheld by the fund house before disbursement.
Systematic investment plan (SIP)
Investment discipline or systematic investing is key to building a long term robust portfolio. Instead of investing a lump sum, the investor can choose to invest in a particular mutual fund scheme on a periodic basis. He not only benefits from the power of compounding but also from Rupee Cost Averaging. This is the ideal investment vehicle for long term investors. Some fund houses offer SIP investments as low as Rs. 250 per installment, making it very attractive.
Fund houses are now providing more investment frequency options for investors - daily, weekly, monthly and others. A daily SIP takes advantage of intra-month swings in prices of stocks, which comprise that scheme's portfolio.
Monthly income plan (MIP)
Yet another option for investors with low risk appetite is MIPs. Funds in this category invest a small portion of around 15 percent to 25 percent of the portfolio in equity and the rest is pumped into debt and money market instruments. Investors must know that unlike what the name suggests, monthly income is not assured but is dependent on market performance.
Investors can get higher returns owing to the fund's equity exposure, compared to fixed deposits and pure debt funds. Medium or risk averse investors can invest in new hybrid products that have exposure to both equity and debt markets.
These hybrid funds have equity exposures varying from 15 percent to 50 percent and an investor can choose such schemes which are in line with their risk appetite. These plans offer a balance of sensible risk with growth potential.
Source: http://economictimes.indiatimes.com/features/financial-times/Invest-in-consistent-mutual-funds-to-beat-market-volatility/articleshow/7042076.cms?curpg=2
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