The Impact of Market Conditions on Mutual Fund Performance

In May 2023, the Indian market is volatile. There is fear in the market for the recession in the European as well as American Economy, which is creating pressure on the investor around the Globe to either sell their holdings or not invest and go for other investment products available in the market, which generates either fixed returns or are comparatively low on risk. But let’s talk to researchers or experts. The current scenario is to keep investing small amounts with proper diversification at regular intervals to generate good returns in the long term once the market starts showing an upward trend.

Sip in the mutual fund is the best way to follow what the experts are recommending:
Let’s talk in detail about mutual funds and investment in mutual funds in this write-up:

What is a Mutual Fund?
A Mutual fund is a platform for financial investment. A professional fund manager manages a pool of money from various investors who share the same investment objectives and put in the same amount for equities. They invest the total collected amount in equities, bonds, securities, other money market instruments etc. The profit generated there is equitably distributed to all the investors of that particular mutual fund.

Investment in mutual funds is suitable for people who want to start investing but don’t have a large amount of money and also for those who do not want to spend their time and energy researching the market, its volatility etc., to decide where to invest. For such investors, mutual funds work best. A financially pro person takes care of their investments and guarantees a stable return.

Why is investing in Mutual funds important?
● When you invest in mutual funds, financially experienced persons work for you to grow your money. Every mutual fund has a fund manager and team that works day and night to ensure minimum market risk and maximum output of your invested money.
● With mutual funds, you can diversify your portfolio even with a small amount of money. It eventually decreases your market risk and increases the chance of higher returns.
● People have different financial needs and goals, and timelines. When you invest in mutual funds, you have various options, such as shares, commodities, gold, bonds, securities, etc.
● After all, what matters the most is transparency and a regulatory framework to ensure the safety of your hard-earned money. SEBI does the same to nurture investors’ investments.

Impact of Market Conditions on Mutual Funds:

Mutual funds invest in a wide range of investment options available. Different types of investments get affected by different types of market conditions.
To make it simpler, there are so many types of market risks that affect the mutual fund investment value.

1. If the price of the shares of a company increases or decreases, it impacts the stock’s investment. This is called equity risk. This fluctuation in price translates to the value of mutual funds.
2. If the central bank increases the interest rate, it negatively impacts the bondholders, government securities holders etc. If you invest in any of those assets, such as bonds, or debt securities, higher interest rates will render the current bonds less valuable, and you will lose your investment. This type of impact is known as interest risk.
3. If you invest in mutual funds with very low returns, your returns will be eroded by inflation. This is termed an inflation risk. Inflation is a normal phenomenon in the money market, and it decreases the value of money over time, so if your return rate is lower than inflation, you get less real money than you invested, even if the number is higher. This market condition affects money market funds because of their extremely low returns.
4. Sometimes if you invest your money in debt funds, credit risk becomes a primary issue. It is the default risk of the security issuer in repaying the principal and interest amounts. Low-quality securities have higher credit risks, so you prefer investing in mutual funds that only invest in high-rated and top-quality securities so that you lower the risk of losing your money.

Apart from the market conditions, several other factors considerably affect your mutual fund performance. Some of those can be the performance of your fund manager, the successful investment of your money in a particular business, the size and cash flows of a fund and expense ratio etc. For example, if the cash flows of a fund are higher, it can diversify its assets, enhancing its chances of generating returns. On the other hand, if due, for any reason, investors sell their interests, it forces the manager to liquidate the assets to handle the redemption demands. This negatively affects the performance of the fund and hence the returns.

How to deal with risks associated with Mutual funds?

● Have a portfolio according to your risk-taking capability:
Avoid taking risks higher than what you can tolerate. Your age, financial goals and needs, risk-taking capability, and everything should be considered before you finalize where to invest.

● Invest through SIP:
Investing through SIP can distribute the risks, decreasing the risk burden significantly.

● Portfolio diversification:
Allocating your investments across shares, bonds, debt funds, securities, ELSS, stocks, equity etc., will balance the market risk and your mutual fund returns.

● Have an emergency fund:
Even before you start investing, you need to have an emergency fund. That fund should have enough money to help you survive for at least 6 months, ideally 12 months. This will help you invest in long-term assets without worrying about liquidity, increasing your risk tolerance.

● Investment advisor:
In the era of information, it is easy to get confused. If you are a noob in finance and get overwhelmed with so much information available, hire an advisor if you can. If you can’t hire a personal advisor, go for a trusted fintech application available in the market. They can analyze your financial status personally and advise what may work best for you.


Investment is a necessity nowadays. So if you are financially independent, do not think twice. Start investing. Open a demat account now and at least start a SIP. It can continue if we keep writing about the importance of investments, especially mutual funds, for your future financial security. By investing, you make your money work to get more money. If you invest smartly, instead of losing the value of your money over time due to inflation, you outpace it and increase the value. You can start investing in mutual funds both online and offline. There are so many beginner-friendly mutual funds you can start your journey with. So it is time to make smarter choices with your money and invest it wisely.

The current market scenario is volatile, and it is the correct time to keep investing through SIP, where we don’t try to time the market. However, the SIP has invested on time automatically on the pre-decided date in the pre-decided amount. It keeps growing the units to have good returns once the market starts showing an upward trend in finances. The Indian economy is growing to be the master of the future in the world hence have patience invest and invest in having a good corpus with good returns in future with long-term investment.


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