Did you know that during the 2020-2021 fiscal year, the mutual fund industry paid out dividends of over Tk 6 Billion. As of the end of the fiscal year 2022, just six new companies had been listed into DSE, compared to eleven in FY2021. Mutual funds, however, are growing in popularity and number. In the fiscal year 2022, around 15 open-end mutual funds and one closed-end mutual fund were granted approval by BSEC, compared to 10 open-end mutual funds and zero closed-end mutual funds the year before. The secondary market has stayed low for the most part of 2022 following global macro challenges. The growth of enterprises was stifled by the rising cost of commodities like food and energy, as well as the depreciation of the taka versus the dollar. Now the questions becomes can mutual fund help investors protect their investment in this volatile market.
What is Volatility?
The term "volatility" is used to describe the up and down swings in stock prices. However, stock price volatility is not limited to the market as a whole. To be more precise, volatility is measured by how much price swings deviate from the asset's mean. In statistics, volatility is typically represented by the standard deviation.
Did you know that during the 2020-2021 fiscal year, the mutual fund industry paid out dividends of over Tk 6 Billion. As of the end of the fiscal year 2022, just six new companies had been listed into DSE, compared to eleven in FY2021. Mutual funds, however, are growing in popularity and number. In the fiscal year 2022, around 15 open-end mutual funds and one closed-end mutual fund were granted approval by BSEC, compared to 10 open-end mutual funds and zero closed-end mutual funds the year before. The secondary market has stayed low for the most part of 2022 following global macro challenges. The growth of enterprises was stifled by the rising cost of commodities like food and energy, as well as the depreciation of the taka versus the dollar. Now the questions becomes can mutual fund help investors protect their investment in this volatile market.
From the above chart, it can be seen that the market index value sometimes rises up and sometimes falls down and it is simply because of volatility. Many things can affect the stock market's volatility, including the economy, investor sentiment, and major world events. It is an inevitable feature of trading stocks and something to keep in mind if you are thinking about buying shares.
Volatility- Fear it or Bet on it?
By now, it should come as no surprise that stock market fluctuations are commonplace. The best response is not to run away from it but rather to welcome it or accept it.
“You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.” - Peter Lynch
Therefore, the question is why we should welcome market volatility. The answer is a bullish market is required for long-term investment to yield a positive return. And, we require the bearish market to seize the chance to buy securities at a discount. The timing of a bear market or a sustained bull market, however, is notoriously difficult to anticipate. Investors with little knowledge might easily lose money in the stock market due to the high degree of uncertainty. The question then becomes: what can investors do to protect their investment at the time of volatility. One of the best solutions are investing in mutual fund.
How can Mutual funds help tame volatility?
The DSE stock market presents 250 Treasury bonds, six corporate bonds, and debentures, along with 300+ shares that are all available for public trade. Because of the state of the macroeconomy and individual firm performance, some businesses may be in a gainer position while others may be in a loser situation.
As investors, we seek techniques to hedge against stock market volatility. Mutual funds can reduce volatility. Mutual funds allow investors to pool their money and invest in various stocks, bonds, and other instruments. Diversification minimizes risk and stock market volatility. Investors likely to attain their financial goals by carefully picking a combination of asset classes.
Source: TakaInvest application
A stock's performance on the stock market might vary widely. Professionals who manage mutual funds utilize their expertise to determine which stocks will yield the highest returns and make those predictions. A single investor cannot keep track of the progress of every stock and every industry. Although the insurance industry was observed to be declining in the quarter of July to September, in the next quarter as of December 29, 2022 it was shown to be increasing with a change of 17.12% in a positive direction. To illustrate how mutual funds might take advantage of volatility, consider the CWT Emerging Bangladesh First Growth Unit Fund's portfolio statement.
While CWTEBGF put 10% of its investment fund into the banking sector in June 2022 As of September, NPLs rose to a whopping Tk 134,396 crore, which was 9.36 per cent of the total outstanding loans in the banking sector. High NPL is a risky thing, which is why; no such investment was spotted in the sector during the subsequent quarter. The previous infographic also demonstrates that the banking sector is experiencing a decline. Seeing the effects of inflation, the asset management firm decided to avoid investing in industries unrelated to purchasing power, such as banking, insurance, and the service and real estate sectors. Fuel & Power, Pharmaceuticals & Chemicals and Telecommunications Industry were prioritized due to their higher safety records.
Can SIP help you to take advantage of Volatility?
Few open-end mutual funds offer Systematic Investment Plan (SIP). SIP users invests a specified amount on a periodic basis.
It may come as a surprise, but market volatility can really be used to your advantage by investing with a Systematic Investment Plan (SIP). Investors in SIPs can help those with a longer time horizon in equities mutual funds by investing in SIP. This strategy can be used to investor’s advantage during periods of market instability. If the fund's Latest NAV falls during a bear market, the investor will receive more shares on the scheduled SIP payment date. Since NAV rises when markets rally, investor can obtain fewer fund units. Thus, market volatility lowers investor’s average cost of investment, increasing returns.
Suppose, you have invested in the Shanta First Income Unit Fund via a systematic investment plan (SIP) of 5,000 taka per month. Here is what have occurred after investments.
Source: TakaMultiply Application
When the markets are falling, you get more units, so your average cost per unit in December will be 13.36 Taka, as can be seen. Alternatively, if you had invested all at once in, say, September or October, you would have paid a higher per-unit cost and earned lower return overall.
Although industry downturns have been few and far between in 2022, rising commodity prices and a weakening taka have kept secondary market activity at historically low levels. By spreading risk across multiple holdings, mutual funds can help investors weather the storm of today's turbulent market. Mutual funds reduce exposure to risk and stock market volatility since investors pool their capital and spread it across a wide range of securities. And this is how mutual fund can withstand volatility in the stock market.