How market volatility is an opportunity in waiting for the long run

Equity markets are likely to remain volatile and we may see some sharp corrections in the near future, till there is a semblance of normalcy in the macro indicators.

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Mutual Fund (MF) is not all about equities and stock market risks.

By Jinesh Gopani

There is a popular adage in the world of investments that goes “The market is designed to transfer money from active to patient. Investing is not about hitting jackpots, it is about creating wealth in a systematic way.” Oftentimes, the word ‘volatility’ scares us since we believe that it is the ultimate risk quotient to an investor. While it surely signifies the unreliability of an investment, it is not the only risk that an investor comes face to face with. In fact, when leveraged correctly, volatility can be an ally to the long-term investor. Allow me to explain with a small example. 

A few years ago, Amit’s cash flow is around INR 25,000 per month. He was scared of investing his money in the equity market due to its ‘volatility’ and failure of capital loss. A few months later, Amit joined a group that would discuss ‘investing’ (in equity, debt and hybrid schemes) and ‘investment principles’ (long-term quality investing to create wealth). Even though he refrained from participating initially, the group became a learning experience for him. Emboldened by his knowledge and their support, he started investing in Mutual Funds at a small SIP of INR 2,000 per month. He diligently tracked the markets and understood the various risks, market cycles and the importance of staying disciplined. Eventually, his small SIP ensured him enough capital to fund his daughter’s higher education abroad. Amit’s journey may not be representative of everyone but there are a few key takeaways for all investors.

The above-stated example clearly demonstrates that investing requires patience, commitment, discipline and the ability to take ownership. Many times, investors panic when markets turn volatile. They tend to get influenced by what they read or listen to and end up making hasty decisions without realizing that one such emotionally-laden decision can lead to underperformance of the overall portfolio.

It is imperative for investors to understand that signs of economic weakness do not mean a halt in the expansion of the economy. If they are invested in ‘quality’ focused businesses, they are likely to survive the volatility in the market. The rise and fall in the market is part of a larger cycle. Take a moment to look at the Nifty 200 Quality 30 Index TRI which clearly showcases how Quality has been a prudent investment option for investors in the long term.

Source: Axis MF Research (Data till April 30 2021) Disclaimer: Past performance may or may not be sustained in the future

Quality businesses are unlikely to put a brake on their expansion plans during a possible slowdown or a change in the market value. The fall could be for a host of reasons that have nothing to do with the viability of the market. Perhaps there was a technical issue or a change in the management structure that led to a correction in the stock price.

Seasoned investors will themselves advocate that many times when a stock is losing a margin of its value, the price is driven by emotions and not fundamentals. Consider the chart below that demonstrates how the performance of quality investments (except for four distinct years as highlighted below) can withstand economic shocks in the long term across several investment cycles. 

Source: Axis MF Research (Data till March 7, 2022) Disclaimer: Past performance may or may not be sustained in the future

So why should you, as an investor, get derailed by short-term irregularities and let go off the larger opportunity at hand? Truth be told, daily fluctuations of price or volatility should not stand in way of assessing the intrinsic value of enterprises. One must research the company and understand its business model extensively, before investing in it or making a beeline to sell it during an off phase in the market. If an investor continues to continuously wait for risk to play out, he might lose opportunities to invest. 

The current environment could cause some well-justified worries in the minds of the investors. Equity markets are likely to remain volatile and we may see some sharp corrections in the near future, till there is a semblance of normalcy in the macro indicators. However, seasoned investors understand that volatility and returns are inclusive of each other. In fact, a correction (even a minor one) can be used to top up and reposition your portfolio to build long-term wealth. It allows investors to focus on sunrise sectors in their portfolios. Frequent corrections amidst a rising bull market may be a healthy sign of a long-term growth story and more importantly, a wealth-building opportunity.

It is imperative that we invest in businesses with a long-term investment horizon and adopt a cautiously optimistic approach. Investors who are willing to employ active interest in managing their portfolios and focus on achieving returns that will account for any potential risks or inflation (or both) have the opportunity to generate and leverage robust long-term wealth opportunities even in the face of volatility! 

(The author is Head Equity at Axis Mutual Fund. Views expressed above are those of the author and not necessarily of Mutual Fund Investments are subject to market risks. Please consult your financial advisor before taking any investment decision)

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