Strategies To Ride the Volatile Market – Mutual Funds & ETFs – Trading Q&A by Zerodha

The economy will not be what investors will do; It will be the investors themselves. Uncertainty is actually a buyer’s friend of long-term values. – Warren Buffett

This quote summarizes how the markets work. The kind of volatility that the markets exhibit makes many investors uncomfortable about investing. There are global factors as well as local ones that include higher oil prices, inflation, accelerating liquidity tightening, and higher omicron cases. It is natural for investors to become more vigilant while investing.

One way to exercise caution in such volatile markets is to reconsider portfolio allocation in stocks.

Here are some strategies that investors can use in such volatile markets to safely exit on the other side of the rising tide

  • Reduce risk by investing in value Value investing is an investment strategy that involves a portfolio of stocks that appear to be trading for less than their true or book value. Mutual funds that invest in such options are called value mutual funds. Value investing helps reduce the downside or risk to investments.
  • Sustainable investing with ESG To protect yourself from the vagaries of the markets, one strategy is to explore sustainable investing with ESG mutual funds. These are funds that invest using ESG factors to select stocks on the shortlist. Therefore, investors can be assured that the shares on which the fund is based have passed very robust and rigorous screening procedures to determine the sustainability of a company or government in ESG standards.
  • Diversification with a fund of funds To simplify the process of selecting mutual funds from a large number of options available in the market, investors can use a stock fund for funds. A fund equity fund is nothing but a mutual fund scheme that invests in other mutual fund schemes. The fund manager in these funds builds a strong portfolio of other mutual funds rather than outright stocks or bonds. The portfolio of these funds suits investors across risk profiles and financial goals due to its diversity in many fund classes, market capitalization and investment styles.
  • Securing emergency funds with liquid funds : While markets are unpredictable, what can be managed is how investors deal with the need for urgent funds by keeping financial support ready. This is also called an emergency fund and can be built using a bank savings account and liquid money schemes. Liquid funds are debt funds that invest in fixed income securities such as certificates of deposit, commercial paper, treasury bills, etc., which mature within 91 days. The best part is that the liquid funds do not have an exit burden after 7 days. These funds are very suitable for risk-averse investors. Given all this, liquid funds can be useful for pooling funds for emergency situations, if any.
  • Go the gold path Gold as an asset class has historically been known to offer inflation-adjusted returns. Therefore, gold can be used as a tool to deal with inflation. Invest in funds that allow you to invest in gold as an underlying asset. They are called gold chests. Gold funds are open-ended funds that invest in the underlying units of a gold trading fund (ETF), with the primary objective of creating wealth by tapping into the potential of gold as a commodity.

With all that being said, the most important strategy investors can use to protect their investment in a volatile market. This can be achieved through a judicious asset allocation strategy.

This is something many investors ignore and end up losing money. It helps investors decide how much to allocate to each asset class.

Asset Allocation Strategy 80-20-12:

Here’s how investors can follow a simple strategy to ensure that their money is allocated safely across asset classes.

Use the three building blocks of asset allocation:

  • emergency block: Before one starts investing, one should at least put aside 12 Months of their monthly expenses for emergencies or expenses.
  • Portfolio diversification block: and the rest 20%, you can go to the traditional and timeless investment option – gold. Because gold has the potential to be a stable form of money. It also has the ability to store value for longer periods.
  • growth block: Once that’s done, make sure of it 80% of the mutual fund portfolio is invested in a diversified equity portfolio to obtain long-term risk-adjusted returns.

Asset Allocation With Asset Allocation 12-20-80

Suppose an investor has a goal of building an entity with Rs 50,000,000 for the education of his child. It has a 10-year investment term.

This example assumes that the investor has already taken care of his emergency fund.

The investor will need to invest ₹ SIPRs. 24408.7 Assuming a rate of return of 10% compound annual growth.

In the ratio of 20:80, the SIP will be allocated as follows to build a diversified portfolio:


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