Every financial market has its ups and downs, so there is some amount of risk involved in stock investment. As the market gets stronger and prices go up, there’s a good chance we might see more ups and downs. With a cautious move and some risk-taking measures, an AMC can easily handle such changes.
An asset management company will never forget that markets—irrespective of where the investments lie—are moody. They never rush to buy or sell an asset just because the price is rapidly changing. Long-term plans formulated deal with the ups and downs, keeping the clients’ investments safe.
So, let us look at how Asset Management Companies adapt to market volatility.
What is Market Volatility?
Market Volatility is the degree or rate of price increases and decreases. The more often and/or the greater the amount of change, the more volatile the market. It is observed by how much the changes in price deviate from the average over time. This is done by using a method called Standard Deviation, which helps indicate how far apart the prices are from the average.
How Asset Management Companies Fight Back with Volatility of the Market
Asset Management Companies like Groww MF measure market volatility by looking at how much prices vary from the average. If prices change a lot, it’s high volatility; if they stay close to the average, it’s low volatility. To manage this, they use careful planning and focus on long-term goals. As expert Benjamin Graham said, while markets can be unpredictable in the short term, they usually reflect their true value over time. So, companies recommend staying steady and not changing your investment plan based on short-term market changes.
Let’s have a look at the strategies AMC’s use to stay steady during times of volatility:
- Balance Risk and Quality
They adjust investments to find a balance between risk and quality. When the market is strong, they invest in smaller companies and specific sectors but avoid putting too much money into any one type of investment. This helps protect against big losses when the market is volatile.
- Diversify Investments
Companies spread investments across different types of mutual funds and assets. This means putting money into various categories and sizes of funds to reduce risk and aim for steady returns. They also invest in low-cost index funds, which generally perform more consistently and have less risk compared to other funds.
- Regular Portfolio Reviews
They regularly check and adjust investment portfolios to make sure they match current market conditions and financial goals. This includes changing the mix of investments, like shifting money between stocks and bonds, to keep the desired level of risk and return.
- Informed Decision-Making
Companies stay updated on market trends, economic indicators, and changes in policies. This helps them make better decisions about where to invest and how to adjust portfolios based on what’s happening in the market.
- Systematic Investments
They encourage using systematic investment plans (SIPs) to keep investing regularly, even when the market is down. This approach allows buying more shares at lower prices during market dips, which can lead to profits when the market goes up.
- Stick to the Long-Term Plan
Instead of reacting to short-term market drops, they focus on long-term investment plans. A well-diversified portfolio is built to handle periods of market fluctuations. They advise keeping your money invested for long-term goals because market changes are part of the path to achieving significant growth.
- See Volatility as an Opportunity
They view market downturns as chances to buy quality stocks at lower prices. For instance, during a market drop, they might invest in strong stocks or funds at cheaper rates, which can lead to big gains when the market goes back up.
- Keep a Solid Emergency Fund
They suggest having an emergency fund with enough money to cover three to six months of living expenses. This helps avoid having to sell investments at a loss during market drops. For those close to retirement, having a larger safety net, like bonds and cash, is recommended to avoid selling investments when the market is down.
- Rebalance Portfolios
They regularly adjust portfolios to keep the right mix of investments. This means changing the amount of different assets in the portfolio to stay aligned with investment goals. Rebalancing helps manage risk and ensures the portfolio remains on track even after market changes. For example, in a falling market, they might move money from bonds to stocks to buy quality shares at lower prices.
Conclusion
To conclude, managing market ups and downs is important for asset management companies. They do this by balancing risk with quality, spreading investments around, and sticking to long-term plans. They also regularly check investments and keep an emergency fund to make sure client money stays stable and can grow, even when the market changes.
