What exactly is Volatility?
Volatility is a phrase used in the finance world to indicate when a market or securities undergoes periods of unpredictably high and occasionally abrupt price changes. Volatility is frequently associated with price drops, although it may also apply to price increases.
What is the India Volatile Index (India VIX)?
The NSE calculates the India VIX, or India Volatility Index, to assess the market’s expectation for volatility and swings in the near future. The NSE originally released this index in 2003. The Chicago Board Options Exchange first established the notion of a volatility index in 1993.
Elements considered while calculating the India VIX
1. Expiry date
The time to expiry is computed in minutes rather than days to reach the degree of precision that traders require.
2. Amount of interest
The applicable tenure rate, which is for 30 to 90 days, is taken into consideration and treated as the risk-free interest rate for the various expiry months of the NIFTY options contract.
The ATM strike price is available at a somewhat lower level than the forward index level for the NIFTY option contract. When computing the India VIX, or volatility index, the bid and ask prices for options contracts are taken into account.
4. Level of forward index
The forward index level is used to identify the out of money options contract that is taken into account when computing the volatility index. This forward index level determines the at-the-money strike, which aids in the selection of the mentioned options contract. Thus, the forward index level is taken into consideration as the most recent accessible price for the NIFTY futures contract for the appropriate expiry date in the computation of India VIX.
How is volatility calculated?
Volatility is a term that describes how pricing changes over time.
Volatility is defined as the standard deviation of a market’s annualised returns over a particular period, or the pace at which its price rises or falls.
It is considered to have high volatility when the price varies fast over a short period of time, hitting new highs and lows. Low volatility is defined as a price that swings up and down slowly or is reasonably constant.
Historical volatility is determined using a series of previous market prices, whereas implied volatility is computed using the market price of a market-traded derivative, such as an option, to look at predicted future volatility.
What effect does Market Volatility have on Investment Returns?
Many investors mistake market volatility for ‘risk,’ yet volatility is actually a reaction or anticipation of a risk occurrence. When attitudes influence prices or there is a lack of direction regarding where the business or asset class is heading, there is a lot of volatility. Sharp fluctuations in an asset classes, securities, or instrument’s performance are caused by volatility.
Market volatility can give investors the appearance that they are losing money, and as a result, many investors abandon mutual funds when they find that they are underperforming. This method is harmful to your investing goals because the funds’ performance may recover and, over time, provide you with very high returns. As a result, if you want to get the best profits, you should invest in mutual funds for at least 5 years.
5 Do’s and Don’ts of Investing in a Volatile Equity Market
1. Don’t give up your Equity
The market moves at its own pace, and you, as an investor, follow the pace of your financial planning regardless of market fluctuations. Volatility, as experienced in recent days, should not cause you to consider selling your stock. Your investments are long-term, whereas disagreement is only fleeting. Staying in the market will allow you to benefit from the subsequent rally. Many investors fled from equity when the COVID epidemic reached India and markets began to tumble. Markets rewarded those who had stayed invested when the rise started.
2. Rather of going all in, make little Consistent Investments
You might have considered purchasing on the dip when the markets plummeted yesterday as a result of rumours of a war outbreak. You’re assuming that the market won’t fall any more if you do this. This is impossible to foresee. So, rather than investing all in on one day, buy in little increments over time to ensure that you successfully lower your average rupee cost of investments. Take advantage of the upcoming fall season to buy in bulk.
3. Don’t Panic
Stock markets are inherently volatile. Markets have historically collapsed in response to such events—whether wars, pandemics, terrorist attacks, financial crises, or other occurrences—and subsequently rebounded. Rather of timing the market, time your investments by setting up SIPs and using the corrections to deploy idle capital.
4. Keep Asset Allocation Goals Tight
If you’re investing to meet your financial objectives (which you should be), stick to it until you’ve met them. When deciding on an asset allocation strategy, several criteria are considered. As a result, you should be unaffected by market fluctuations.
5. Evaluate your Portfolio
Individual equities and sector-specific exchange-traded funds (ETFs) may have taken different paths when broad indexes were down. Examine the state of your financial portfolio to discover if you need to sell a particular stock, mutual fund, or ETF, or if you need to add to your holdings. For majority of the listed firms, nothing has changed fundamentally.
How can you overcome the market volatility?
- Volatility should not be a concern if you have a 10-year investing horizon. The consequences of short term volatility can be smoothed out over a period of ten years.
- You should stick to your investing goals since you know you’ll make large gains at the conclusion of your time invested.
- Invest in a combination of equities and debt mutual funds while investing in mutual funds. Because debt funds are low-risk and less influenced by volatility, they will hedge out the volatility even if equities funds do not perform well.
- At least once a year, look through and adjust your mutual fund portfolio. To some extent, this will assist you in overcoming the impacts of volatility.SIPs are a good way to invest in mutual funds
- SIPs are one of the greatest strategies to invest in mutual funds since market timing and volatility have the least influence on them.