The past one year has been quite a volatile space for the market with occasional highs and lows, but mostly it has remained flat. Investment portfolios have not given a high alpha. Amateur investors have tried timing the market as always, but the volatility has been quite persistent in the market especially in the last one year or so.
There could be multiple reasons, both domestically as well as internationally to account for the same, but the overall fundamentals haven’t changed. Does short-term market volatility worry the investor in you? Or are you a seasoned investor who has sailed through many highs and lows to understand the economics of the market and trust the fundamentals and not the sentiments?
The capital market is strained and unpredictable. However, even you would agree that this is a short-term phenomenon. So, in the short run, the market is primarily affected by investment sentiments. If the investors perceive good returns in the near future or an upcoming positive event, they invest a lot of money in the market, causing a rise in the stock market and if any instability or a negative event is perceived, there is tremendous selling of assets, bringing down the market performance. This is how the index responds to volatility in the market in the short run. Market volatility, therefore, runs on sentiments and sentiments are short-lived.
However, if you are not a fly-by-night investor and you invest with a long-term perspective, you need not worry about the sentiment driven short-term market volatility. In the long run, the market corrects itself because it is driven by fundamental factors. Do you know what these factors are?
The fundamental factors that drive the market
The markets perceived a short-term volatility because of the elections. However, once the Government is formed and there is political stability, the markets could stabilise. Political stability is an important fundamental affecting the market because the investment policies formed by the Government have a direct bearing on returns.
If the country’s GDP is growing, the per capita income is also growing. A higher income means increased savings as investors have surplus disposable income in their hands. Thus, GDP is directly linked with the market. If the GDP grows on a year-on-year basis, markets would grow, irrespective of volatility.
Company’s performance and stability
The capital market is made up of hundreds of companies and the growth of the market depends on the growth of the companies comprising it. If you invest in a strong company which has a good price earning potential and profitability ratios, has a stable capital base and has the potential to grow, your investments would grow over the long run even if the company is experiencing short-term volatility.
The bottom line
Investors who are in the investment game for the longer haul, market fluctuations should not matter. You need to choose and stick to your investments according to your asset allocation. Market volatility should not put you off investments. The above-mentioned factors are the fundamental factors which drive markets in the long run. Over a long-term period, markets are dictated by these factors and not short-term sentiments. So, don’t panic in volatility. Keep calm and keep investing and your investments would bear fruits over long term.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.