What common mistakes do mutual fund investors make during market volatility?

• Panic selling during market drops locks in losses, hurts returns
• Frequent fund switching and stopping SIPs reduce long-term gains
• Key to volatility: maintain asset allocation and diversification

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Nobel laureate Paul Samuelson famously remarked, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Periods of market volatility often test investors’ patience and discipline. With ongoing global uncertainties such as the geopolitical tensions in the Middle East, markets can react sharply, creating anxiety among investors. However, how investors respond during such times often determines their long-term investment outcomes.

Many mutual fund investors make costly mistakes during such periods, often driven by fear and short-term thinking.

Rohit Mattoo, Head - Retail Sales, Axis Mutual Fund, "As a retail investor, it’s easy to be swayed by daily market news, especially with the constant stream of headlines and reports about market movements. It's natural to feel concerned or even panic when markets experience volatility. However, reacting impulsively to every market shakeup can hurt your overall investment strategy and erode returns. Short-term market fluctuations are inevitable, but they are often not indicative of the broader long-term market trajectory."

Here is a list of common mistakes investors make during market volatility.

Panic selling during market falls

One of the most common mistakes is redeeming mutual fund units when markets decline. When investors see the value of their portfolio falling, many rush to redeem their investments to avoid further losses.

“Mutual fund investors often make mistakes during volatile periods that can hurt their long-term returns. The most common one is panic selling. When markets fall sharply, many investors redeem their mutual fund units to avoid further losses. Unfortunately, this reaction locks in losses and prevents them from benefiting from the eventual market recovery. Historically, equity markets have rebounded after periods of uncertainty, rewarding investors who stayed invested,” said Dr Jyoti Garg, Assistant Professor of Finance and Accounting, Great Lakes Institute of Management, Gurgaon.

Selling during a downturn locks in losses. Markets tend to recover over time, and investors who exit during panic often miss the rebound. Long-term mutual fund investing works best when investors stay invested through market cycles.

Switching funds too frequently

During volatile periods, investors often shift their money between funds, sectors, or asset classes in search of better short-term performance.

Maintain your original split between equity and debt exposure in your existing portfolio. "If your original long-term asset allocation split is, for example, 70 percent equity and 30 percent debt, continue with the same (do not increase or reduce equity allocation). You can decide your asset allocation based on your time frame, tolerance for market declines and return expectations," said Jiral Mehta - Senior Manager - Research, FundsIndia.

Stopping your existing SIPs

Systematic investment plans (SIPs) benefit from volatility by accumulating more units during a market fall and participating in the subsequent recovery. "Some of us get upset when the market falls and stop doing SIPs, but by doing so, they miss the benefit of accumulating units at a lower price and end up with a lower return despite a long-time frame," said Mehta.

Trying to time the market

Another frequent mistake is attempting to predict market highs and lows. Some investors exit funds expecting markets to fall further and plan to reinvest later at lower levels.

In practice, timing the market consistently is extremely difficult, even for professional investors. Many people end up selling low and buying back at higher prices, which erodes returns.

Ignoring asset allocation

Volatility can disrupt a portfolio's balance. For instance, equity investments may fall while debt funds remain stable.

Many investors fail to rebalance their portfolio to maintain their original asset allocation. Rebalancing helps control risk and ensures the portfolio remains aligned with long-term financial goals.

“Not rebalancing equity allocation if it falls short by more than 5 percent from original allocation, i.e. move some money from debt to equity and bring it back to original long-term asset allocation,” said Mehta.

Not well diversified

Many investors believe they are diversified simply because they own mutual fund schemes. In reality, their portfolios often end up concentrated in a few sectors, investment styles or regions.

One must make sure that their equity portfolio is well-diversified across investment styles (quality, value, growth, midcap, and momentum) and geographies.