Befriending volatility while investing can help you create wealth

We prefer ‘sure-shot’ solutions. We hate uncertainty. Our money matters are no different. These are common views on investing. Besides the problem of low savings; many young individuals procrastinate to invest in volatile investment options such as stocks primarily due to volatile nature of returns on offer.

However, rarely do they understand that volatility is here to stay and if used to their advantage, volatility can help them to create wealth. “When grocery prices fall you can buy more. The same principle applies in the financial markets. Volatility gives you the opportunity to buy more shares or more units of a mutual fund,” says N Arunagiri, MD and CIO of Chennai based TrustLine India, a portfolio management services provider.

Volatility is omnipresent

If you believe that volatility will haunt you only in stock market investments, it is time to wake up. All your traditional fixed income investment options are also subject to volatility. Interest rates on small saving schemes are reviewed every quarter. For example, five year National Saving Certificate offers interest rate of 7.9% as compared to 8.1% a year ago. Banks and other deposit accepting NBFCs also keep re-pricing their fixed deposits. As interest rates are expected to go up, the bond funds with high duration portfolios are seen as high risk bets. In February 2017 investors in government securities funds on an average lost 2%.

While your assets are bogged down by volatility; your biggest liability –home loan is a floating rate demon.

It is better to accept the fact that volatility is here and it will stay forever. Earlier you accept it easier it will be for you to make it bat for you.

Making friends with volatility

“You cannot beat inflation and save for your long term goals using fixed deposits. Some allocation should be done to stocks,” says Suresh Sadagopan, founder of Mumbai based Ladder7 financial advisors. Stock markets are volatile in nature in short term, but in long term the markets are slaves of corporate profitability, he points out. In the long term there is a fair chance of making money if you own good companies or invest in well-managed equity funds. The best way to do this is to go for equity mutual fund through systematic investment plans (SIP). “Many young investors have realised the importance of SIP and compounding of money. But they want to see the results in a year or two,” says Rohit shah, founder of Mumbai-ased financial planning firm GettingYouRich. Opt for long term SIP and you will see volatility rewarding you in a big way, he adds.

This can best be seen in volatile markets. HDFC Prudence Fund, the largest scheme with sizable exposure to stocks has given 16.82% returns if you have opted for a monthly SIP from January 1, 2008 till April 1, 2017. However, if you have invested lumpsum money in the same scheme at the beginning of the period, you would have settled with 12.2% rate of return provided you stayed the course despite the sell-off seen in the year 2008 due to global crisis.

“If you hold on to your investments and add more to them in volatile times, you stand a chance of taking home more money when markets recover,” Arunagiri adds. Volatility can become a stepping stone to your long term journey of wealth creation.

Focus on long term

Volatility is a typical short term phenomenon. If you can overlook it, you can help yourself to move closer to financial freedom. “Include volatile investment options such as stocks and equity mutual funds only in your long term portfolio meant for long term goals,” advises Rohit Shah. Most of you have to work hard on your long-term goals such as child’s education and retirement. If you use online calculators and look at numbers, the task appears to be daunting. But one factor that works in your favour is time on hand. You can invest for long term and make volatility work for you. But, a word of caution here.

Volatility can destroy your short-term financial goals if you try to fund them using equity mutual funds. For example, if you invest money meant to fund your child’s school admission due next year in stocks or equity mutual funds and market crashes, you may not be able to achieve your goal. Here the volatility should not be blamed. If you stick to the golden rule of using stocks only for long-erm goals, volatility will play in your favour. If you have been allocating money in stocks and equity mutual funds to fund your goals, do not forget to move that money into bonds and fixed income options as you move closer to your financial goal.

Volatility cannot be avoided but if handled well it can help you create wealth in long run.