Mutual Funds in a Volatile Market: What Should Investors Do?

If you have been keeping an eye on the markets recently, you must have noticed the unpredictable swings. One day, the Sensex and Nifty touch new highs, and the very next day, they sharply correct, leaving investors worried and confused.

For mutual fund investors, this volatility raises common questions like:

• Should I stop my SIPs?
• Should I withdraw my investments?
• Should I wait and do nothing?

These are natural concerns, and you are not alone in thinking this way. However, it is important to understand that volatility is a regular part of the market cycle. The way you respond to these fluctuations will determine whether you create long-term wealth or make costly mistakes.

Understanding Market Volatility

Volatility simply refers to how much and how quickly prices of stocks or assets move up or down. Higher volatility means larger price swings in a shorter time.

For mutual fund investors, volatility directly affects NAV (Net Asset Value), which represents the value of each fund unit. When markets fall, NAVs fall too. However, a falling NAV does not automatically mean your fund is bad. It only reflects the temporary decline in the value of the underlying assets.

Historically, good funds recover well when the markets stabilize. The key is to stay invested and avoid hasty decisions.

Key Reasons for Volatility in 2025

The current volatility in the markets is not entirely random. It is driven by a combination of global and domestic factors, including:

1. Geopolitical Tensions and Global Conflicts
   The ongoing Russia-Ukraine war continues to disrupt energy supply chains. Additionally, tensions in the Middle East and the Red Sea shipping crisis have further strained global trade routes. As oil prices fluctuate due to supply disruptions, global inflationary pressures rise, impacting economies and financial markets.

2. Interest Rate Uncertainty
   Central banks, especially the US Federal Reserve and the Reserve Bank of India, are sending mixed signals about future interest rates. Uncertainty over whether rates will be cut, held steady, or hiked again is making investors nervous.

3. Slowing Global Economy
   International agencies such as the IMF have forecast global GDP growth at a modest 2.9% for 2025. Slower growth, particularly in major economies like the US and China, directly impacts India’s exports and corporate earnings, contributing to market uncertainty.

4. Policy Uncertainty Post-Elections
   Following the recent general elections in India, the new government’s economic policies are still being finalized. Investors are cautious until clear directions emerge around taxation, infrastructure spending, and reforms.

5. Sectoral Shifts
   There is a major shift underway, with sectors like technology, electric vehicles, and renewable energy gaining investor attention, while traditional manufacturing and legacy industries are losing favor. Such transitions always come with volatility as money rotates between sectors.

What Happens to Mutual Funds in Volatile Markets?

Equity mutual funds are directly impacted when stock markets fall — their NAVs immediately decline. Even debt funds face pressure, especially when interest rates rise and bond prices fall.

However, historical data shows that every major correction has eventually been followed by a strong recovery. The investors who remained invested — instead of exiting in panic — were the ones who benefited the most when markets rebounded.

Common Mistakes Investors Make During Volatility

Emotional reactions often lead to poor investment decisions. Many investors:

• Pause their SIPs, fearing further losses.
• Withdraw their investments to keep cash or shift to traditional options like fixed deposits.
• Chase gold investments, assuming they are safer.

These reactive decisions usually backfire. Investors end up missing the recovery rally, locking in losses, and earning lower returns than those who stayed invested.

What Should Smart Investors Do?

Here is a practical approach for investors who want to create long-term wealth despite volatility:

1. Understand That Volatility is Normal
   Markets have never moved in a straight line, and they never will. Even after several crashes, the Nifty has delivered an average return of around 12% CAGR over the last 20 years.

2. Continue Your SIPs
   Pausing SIPs during corrections defeats the very purpose of systematic investing. When markets fall, SIPs allow you to buy more units at lower prices, helping you average your cost over time — a concept called Rupee Cost Averaging.

3. Review, But Don’t Panic-Sell
   It is wise to review your portfolio, but not with the intention of exiting in panic. Check whether your funds are still aligned with your long-term goals and risk tolerance. If needed, rebalance your portfolio with the help of your advisor — but avoid emotional exits.

4. Diversify Across Asset Classes
   A balanced portfolio includes more than just equity funds. Adding some allocation to gold funds, debt funds, and even international funds can help cushion the impact of volatility.

5. Ignore Sensational Headlines
   Media headlines tend to exaggerate short-term risks, often creating unnecessary panic. During the COVID-19 crash in 2020, news reports predicted prolonged collapses, yet markets recovered sharply within a year. Successful investors are those who ignore short-term noise and focus on long-term trends.

6. Use Corrections as Buying Opportunities
   If your financial plan allows, market corrections can be a great chance to invest extra amounts at discounted valuations. This should only be done if you have a long investment horizon and adequate emergency savings in place.

Data Snapshot (2025)

Here’s a quick look at how different asset classes have performed recently:

This clearly highlights why diversification matters — no single asset class consistently outperforms.

A Real-Life Example — Learning from COVID-19 Crash (2020)

In March 2020, the Nifty fell by nearly 38% within a matter of weeks due to pandemic fears. During that period, mutual fund SIP cancellations jumped by over 30%, as many investors panicked.

However, by March 2021, markets had not only recovered but had also gained over 80% from the lows. The investors who stayed invested or even added to their portfolios during the crash saw significantly higher long-term returns.

Final Thoughts — Stay Calm, Stay Invested

Market volatility is temporary, but wealth creation is a long-term process. Mutual funds are designed for long-term goals — be it retirement, children’s education, or wealth building. Short-term market noise should not drive your long-term investment decisions.

If you ever feel confused or anxious during volatile times, reach out to your financial advisor. Together, you can review your goals, realign your portfolio if necessary, and move forward with confidence.

At the end of the day, volatility is like turbulence during a flight — uncomfortable but temporary. You do not jump off the plane; you trust the pilot. In your investment journey, your financial plan is the seatbelt, and your advisor is the pilot guiding you through.

Thank You.