Market volatility is a short-term oscillation in stock prices driven by market demand and supply forces, which are caused by varied geopolitical tensions, global economic events, inflation, and dipping economic growth fears. Reaction to corporate earnings, increasing inflation disrupts retail demand, and monetary policy changes impact borrowing costs for businesses. Moreover, fiscal policy dynamics driven by government interventions also trigger securities market volatility extremely. For instance, capital gains tax changes in Budget 2024 brought a significant dip in the market.
Sensitive geopolitical situations such as fear of imposition of high tariffs by Trump government, threat of HMPV, falling rupee, FII flows, etc. are triggering market volatility at present.
Despite short-term risks, Morgan Stanley projects that strong earnings growth, macro stability, and domestic investments could propel India’s Sensex to 1,05,000 in 2025. However, risks include global slowdowns and rising oil costs.
In such a scenario, mutual funds can play a significant role in helping you reach your financial goals, even amid market volatility and inflation, by offering diversified, professional investment management tailored to your objectives. SEBI Chief Madhabi Puri Buch at NSE’s Samvad Symposium on January 10, 2025, said, “The growth of mutual funds in our country is very strong.” She highlighted the sector’s strong governance and disclosure practices that are benefiting more citizens in wealth creation.
Let us see how mutual funds can help you:
Mutual funds invest in a diverse array of assets, including stocks, bonds, and other securities, by pooling the money of several participants. This diversity helps control market volatility by lessening the impact of any one investment’s poor performance. For instance, on one side, for long-term objectives, equity funds have the ability to grow faster than inflation even in the face of short-term market swings, and on the other side, debt funds are ideal for short- to medium-term objectives, as they provide greater stability and reduced risk during volatile periods.
Besides, certain types of mutual funds are designed to shield against inflation. For instance, diversified equity funds, dividend yield funds, solution-orientated funds for different investors with different financial goals may be for children’s education, retirement, etc.
Also, many mutual funds offer systematic plans such as Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs), which promote disciplined and strategic investing.
- SIPs help you invest regularly, leveraging rupee cost averaging to reduce the impact of market volatility while building wealth consistently;
- SWPs provide steady cash flow during retirement or for periodic expenses;
- STPs allow a gradual shift between funds to manage risk.
These plans are ideal for navigating market fluctuations and staying aligned with long-term financial goals. Debt or hybrid funds may be suitable for short-term financial goals (such as financing college or purchasing a car). However, equity funds can offer superior returns to offset inflation for long-term objectives (such as retirement or home ownership).
Moreover, mutual funds are managed by experienced fund managers who adjust the portfolio in response to changing market conditions. This active management helps mitigate risks during market fluctuations and inflation.
Furthermore, most mutual funds offer high liquidity and enable you to redeem your investment when needed. Such flexibility helps you to align investments with life changes and unforeseen expenses.
Mutual funds also provide tax advantages, such as exemptions on long-term capital gains (up to a certain limit) or benefits from investing in tax-saving funds (ELSS). Tax-efficient investing can help you retain more of your returns to meet your financial goals.
Let us see the steps to leverage mutual funds:
Apart from the above, while initiating your mutual fund investment journey in 2025, you must know various mutual fund categories. As per SEBI guidelines on Categorisation and Rationalization of schemes issued in October 2017, mutual fund schemes are classified as:
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution-Orientated Schemes—For Retirement and Children
- Other Schemes: Index Funds & ETFs and Fund of Funds
These categories are further bifurcated into sub-categories such as large-cap, mid-cap, and small-cap, among various others. Hence, you should know the following fund categories for investments in 2025:
1. Large-Cap Funds
They invest in the top 100 companies by market capitalisation, offering stability and consistent returns. In 2024, large-cap funds delivered a 1-year absolute return of 16.33%, reflecting their reliability in generating steady growth over time.
2. Flexi-Cap Funds
They provide flexibility by investing across large-cap, mid-cap, and small-cap stocks, adapting to market conditions. In 2024, these funds achieved a 1-year absolute return of 20.42%, showcasing their dynamic approach to balancing risk and return.
3. Value Funds
These funds focus on undervalued stocks with strong fundamentals, aiming for long-term appreciation. In 2024, value funds recorded a 1-year absolute return of 20.65%, indicating their potential for substantial growth.
4. Aggressive Hybrid Funds
A combination of equity and debt instruments, offering growth potential with reduced risk, these funds achieved a 1-year absolute return of 16.82% in 2024, reflecting their balanced performance across market cycles.
Moreover, it is of integral importance that you keep abreast of market trends and economic indicators. For example, small-cap funds have shown significant growth, with assets under management rising from ₹51,161 crore in January 2020 to ₹318,281 crore in November 2024. However, it’s essential to assess whether this growth aligns with your risk tolerance and investment objectives.
Regularly reviewing your portfolio’s performance and adjusting your investments to stay aligned with your financial goals could be a suitable investment technique.
Nonetheless, you should allocate your investments across various asset classes and sectors to spread risk and consider including debt funds or gold funds to hedge against inflation and market downturns. For instance, sectoral and thematic funds attracted double the investment month-on-month in December 2024, reaching ₹153.32 billion, aided by the launch of 12 new funds.
Wrapping Up
To sum up, investing in 2025 amid market fluctuations and inflation requires a disciplined and strategic approach, with mutual funds offering a versatile solution. By leveraging diversified fund options, systematic plans like SIPs, and regular portfolio reviews, you can effectively manage risks and align investments with your financial goals. Staying informed and seeking professional advice ensures your strategy remains adaptive to changing market conditions.
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