PowerMF Blog – Empower Yourself

One major reason which keeps most savers out of the Equity Markets (either directly or through Mutual Funds) is the Volatility that is part & parcel of the Markets. While most people know that equities provide an opportunity for better returns that most other asset classes over a longer duration, it is the fear of volatility which keeps them out of it. The impact is clearly seen in the number of investors getting into the equity markets. It is understood that there are around 3 cr. investors in Mutual Funds and 1.5 cr. Demat account holders in the country of 120 cr. population and around 10 cr. PAN Card Holders.

The objective of this post is to explore the ways in which one can benefit through this volatility.

1. Trading : One of the most often used strategies for benefiting from market volatility is ‘Trading’. In this, one will take a position depending on his expectations on the movement of a stock. If his position is right, he ends up benefiting from the volatility and if his position is wrong, he ends up losing money. Though, Trading is one of the most famous of the approaches among investors, it is only for the Brave Hearts owing to the risk involved. Also, over a long run, it has proved to be very difficult to benefit from volatility as the law of averages do work when one has to take a lot of decisions.

2. Future & Options : The other strategy used is taking positions in the Future & Options segment of the market. In the F&O Segment, both Hedging as well as Trading happens. Hedging is the process by which one tries to negate the impact of volatility on his portfolio which is at a cost. Hence, when he is saved on the downside, the benefit from the upside also gets reduced. The other activity of Trading in Futures and Options have the same features are trading mentioned above and in fact is much more risky owing to the gearing involved.

Hence, both these options of trading in Stocks and F&O does not provide the opportunity for benefiting from market volatility or there is too much of risk involved in the same.

Is there any other way? Yes. It is Discipline. Like in any other area in life, even in investments, it is the Discipline which enables one not only in his endeavor to create wealth but also to benefit from volatility.

Systematic Investment Plan(SIP)

It is common knowledge that Systematic Investment Plans (SIPs as famously known) in Mutual Funds (specifically Equity Mutual Fund Schemes) enables one to take a systematic approach to savings and investing creating a discipline. But, do you know that it is also one of the most efficient ways to benefit from volatility?

Yes, SIP is one of the most efficient ways to benefit from the volatility. The markets move up and down over a period of time. By investing through SIP, one has the opportunity to enter at every stage of the market. As a well known saying goes, ‘law of averages always works in every aspect of life’. SIP is one such scheme among investments that is available to an individual which works on the concept of law of averages. Hence, it is bound to be very successful one. Further, owing to the amount being invested each month remains to be the same, when the markets are up, you get lower number of units and when the markets are down, you get higher number of units. This makes the average price of the investment a weighted average thus reducing the average cost of purchase of units. This concept is also called ‘Rupee Cost Averaging’. Thus, when the markets are volatile (meaning the price keeps going up and down), as an SIP investor, one gets to enter at each of the levels and thus benefits from the volatility through the law of averages.

What’s more? SIPs should always be looked at as a long term investment. This enables the Power of Compounding work in your favor. Power of Compounding is a highly powerful tool, which is clearly brought out by the quotation “The most powerful force in the universe is compound interest”. This is a quote from a noted scientist, Albert Einstein. So what are you waiting for? Benefit through Discipline and make the market volatility and power of compounding work in your favor.

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