The stock market is a broad measure of the overall economy in India and is affected by many variables, such as fund flows, interest rates, inflation, oil and geopolitical events.
The stock market in India fluctuates every second, and with each change in price there are stock winners and losers, money to be made or lost. Too much volatility means that there is uncertainty in the market which is not good for fund investors. Professional mutual investors and portfolio managers attempt to insulate their fund portfolios from volatility by diversifying their overall investments so that if one stock declines in value another stock picks or vice versa. For example, if they own a tech fund, investing in a health fund or bond mutual fund can act as a counterbalance in case the tech fund suddenly reduces in price.
Stock market volatility can be thought of as is a measure of how much the stock market overall value fluctuates up and down. Individual mutual funds or stocks can be considered volatile as well. Mutual fund investors can calculate volatility by looking at how much a funds price varies from its average price. Standard deviation is the statistical measure commonly used to represent volatility in asset prices.
The VIX tracks the speed of stock price movements in the Nifty. Though market volatility can be a useful measure, calculating and interpreting volatility is a difficult task and may lead to poor investment decisions.
Different stocks or mutual funds are more volatile than others. Shares or mutual funds of large cap companies do not make very big price swings, while shares or mutual funds of a smaller cap companies may do so often. Hence large cap funds or blue chip funds are considered to have low volatility, while the small cap funds have high volatility.
Volatility should be thought of as a measure of price uncertainty. Volatile is also known to increase around key events like quarterly earnings reports because of uncertainty. Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, recessions, slowdowns and other big downward moves. However it is very important to note that volatility doesn’t measure the direction of the market. It’s simply a measure of how large the price swings are.
Historical volatility is a measure of how volatile an asset was in the past ( backward looking ), while implied volatility is a metric that represents how volatile investors expect an asset to be in the future (forward looking). Implied volatility (IV) can be calculated from the prices of options i.e. the put and call. In times of high volatility some fund managers may buy put options to defend against a move lower in the underlying asset, if the general sentiment is bearish and expects prices to fall. If the nifty falls, the puts increase in value and offset losses from the portfolio.
During times of stock market volatility, a view that may be used to navigate a volatile market involves actively seeking out mutual funds that have been under valued by the market, which implies that they are selling for less than what they are actually worth. This view is based on the notion that the stock market in these market stress situations often over reacts to both positive & negative views or surprises, which leads to mutual fund price changes that are more dramatic than they actually should be. Eventually, over time and in the long run, the true value of the fund will be reflected in its actual NAV price and the mutual fund investment will earn a profit.