4 Best Equity Mutual Funds to Invest in a Volatile Market

The equity market has witnessed intense volatility off late due to factors such as elevated inflation levels, fears of global slowdown, shrinking profitability of India Inc., heavy selling by foreign investors, and the more recent Adani saga. Several key equity indices are down sharply from their peaks. This has impacted returns of equity mutual funds as well.

Naturally, many investors, especially novices, are anxious about investing in equity mutual funds. But it is important to note that volatility is the inherent nature of the stock market and equity mutual fund investment. If you react to every phase of market volatility and redeem your investment, you may end up missing your financial goals. Therefore, as long as you have made the best and the most suitable investments, it is important that you stick to your investment plan regardless of the ups and downs in the market.

[Read: A SMART Way to Select the Best Mutual Funds for Your Goals]

Historically too, markets have faced intense volatility to various events such as the dot-com bubble crash of early 2000, the sub-prime crisis of 2008 and the ensuing recession, the COVID-19 pandemic, the Russia-Ukraine war, etc. Despite these volatile events, the equity market has grown manifold over the years, thereby compounding investors' wealth and rewarding them for their patience.

That said, if a volatile market still makes you jittery, you may need to reconsider your risk appetite and investment strategy. You may consider equity mutual funds that are relatively less risky and are well-placed to handle market volatility and uncertainties.

Which are the best equity mutual funds to invest in a volatile market?

Best equity mutual funds to invest in a volatile market #1: Aggressive Hybrid Funds

Due to the aforementioned challenges, the equity market is likely to show muted growth in 2023. On the other hand, debt investments are expected to fare better as we near the end of the rate hike cycle and the subsequent easing of interest rates. This is because when interest rates start declining, debt instruments offer better returns due to the inverse relationship between interest rates and bond prices.

Keeping this in mind, it is better to play safe and diversify your portfolio across equity and debt. Aggressive Hybrid Funds are hybrid mutual funds that invest predominantly in equity and equity-related instruments (65-80% of their assets) along with meaningful exposure to debt securities (20-35% of their assets). This approach provides you with the benefit of the upside potential of equity investment at a lower risk as compared to pure equity funds.

The equity part of the Aggressive Hybrid Fund offers you the opportunity to benefit from the long-term growth of equities, while the debt part of the portfolio offers stability and cushion against equity market volatility.

Click here to find out PersonalFN's list of the best Aggressive Hybrid Funds to invest in 2023.

Best equity mutual funds to invest in a volatile market #2: Large Cap Funds

Large Cap Mutual Funds invest in market leaders that have a market capitalisation of more than Rs 20,000 crore. Being market leaders, large-cap stocks have the better ability to manoeuvre through market phases and tide over volatility. Apart from being market leaders, blue chip stocks (or companies) have well-established brand recall value, economic moats, competitive pricing, ethical and efficient management, governance and compliance practices, solid balance sheet, and surplus cash reserves. And most importantly, they enjoy customer loyalty that helps them tide over the tough times.

This enables Large Cap Funds to offer stability and witness lower downside risk compared to Mid Cap Funds and Small Cap Funds during phases of high market volatility. Thus, when you invest in Large Cap Mutual Funds, you benefit from the steady growth of capital over the long run without exposing your portfolio to high risk.

If your aim is to earn returns in line with the market, you may also consider passively managed mutual fund schemes (Index Funds or ETFs) that track large-cap indices such as Nifty 50, Nifty 100, and Nifty Next 50.

Click here to find out PersonalFN's list of the best Large Cap Mutual Funds to invest in 2023.

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Best equity mutual funds to invest in a volatile market #3: Flexi Cap Funds

As you may know, market cap performance differs every year; sometimes large-caps outperform, while other times, it could be mid and small-caps. Hence, diversification across the market cap, viz. large-cap, mid-cap, and small-cap, can help you to lower the impact of volatility on your portfolio and thereby earn better risk-adjusted returns. Investing in Flexi Cap Mutual Funds is a great way to diversify your portfolio across market caps and thereby maximise portfolio returns over the long run.

Flexi Cap Mutual Funds have the flexibility to increase/decrease exposure to a particular segment depending on market conditions, liquidity conditions, and valuations. This gives fund managers greater scope to identify attractive opportunities from a large universe of stocks, thereby reducing the risk. Thus, Flexi Cap Mutual Funds can potentially generate stable returns across market phases.

Click here to find out PersonalFN's list of the best Flexi Cap Mutual Funds to invest in 2023.

Best equity mutual funds to invest in a volatile market #4: Value Funds

Value Funds aim to pick undervalued stocks, i.e., the stocks' whose current market price is lower than their intrinsic/fair value but have strong fundamentals and high-growth potential. Value Funds tend to underperform during momentum-based market rallies that generally favour growth stocks. But when the market realises the true potential of value stocks, the NAVs of Value Funds soar, and investors are rewarded with attractive gains.

Value Funds can offer a better risk-reward potential and act as a great diversifier because they are better positioned to manage the downside risk during a market fall. They also tend to do well during phases of market recovery. Against the backdrop of geopolitical tensions, supply chain disruptions, elevated inflation, central banks across the world raising interest rates, and heightened stock market volatility, value investing may continue to be in focus, just like it has in the last couple of years.

Click here to find out PersonalFN's list of the best Value Funds to invest in 2023.

How to invest in equity mutual funds during a volatile market?

Investing via the SIP route is the best way to beat market volatility. If the market volatility continues or if the market corrects further from the present level, the inbuilt rupee-cost averaging feature of SIPs would take care of the intermittent volatility, more units will be added on during the corrective phase of the equity markets, and when it begins to ascend again, this strategy will compound your wealth.

[Read: Why It Makes Sense to Step-up SIPs Amidst Volatile Equity Market Conditions]

Furthermore, when you invest via SIPs, you don't have to time the market as you invest regularly, regardless of the market conditions. This strategy helps you mitigate the impact of volatility and compound your wealth in the long run.

Lastly, ensure that you have an investment horizon of at least 5 years when you invest in equity mutual funds.