Volatility on the D-Street is at its peak as the Lok Sabha elections are underway and we see more of a cautious sentiment among investors. So, as the volatility element plays a crucial role when determining asset allocation for one’s portfolio, here are the different mutual fund categories you may consider to invest in as per experts:

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Highlighting the importance of volatility in asset selection, Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Research India said, “volatility of an asset class is an important consideration when forming the asset allocation of an investor, based on his/her risk return objectives and investment time horizon. For instance if an investor has low risk tolerance or a shorter investment horizon, asset classes with lower volatility will find greater weights in the portfolio.”

Largecap funds:

Atul Parakh, CEO of Bigul, is of the view that given the volatility in the Indian markets amid the ongoing Lok Sabha elections, large-cap funds invest in stocks of well-established, large companies. These companies tend to be more stable and resilient during market downturns compared to smaller companies. Some top performing funds from this category are ICICI Prudential, Kotak Bluechip, Mahindra Manulife & Edelweiss. 

Flexicap funds:

Flexicap funds are open ended, dynamic equity funds that invest across  various market capitalizations, i.e. large-caps, mid-caps & small-caps. During volatile times, the fund manager can increase exposure to large-cap stocks for stability and reduce exposure to riskier mid and small-cap stocks, added Bigul. Some top performing funds from this category are Parag Parikh, Union, Quant, & Franklin. 

Chirag Muni, Executive Director, Anand Rathi Wealth Limited is of the view that diversified mutual funds, spanning categories like Large Cap, Mid Cap, Small Cap, and Flexi Cap, offer a well-rounded strategy, spreading investments across sectors and market capitalizations. This not only cushions against sector-specific risks but also aligns with the overarching goal of building a resilient portfolio capable of riding volatile markets. 

Additionally, funds from categories like index funds may not offer alpha but provide exposure to broad market indices, further diversifying the investment portfolio, the expert added.

Debt funds: 

Investors who refrain from taking high risk can opt for debt funds especially those that invest in government securities. These funds primarily offer stability to your portfolio though with a lower return potential in comparison to equity  funds.

Hybrid funds:

Hybrid funds offering a mix of equity and debt exposure can also be a good option to bet on  providing some level of stability from the debt portion. Currently as per SEBI classification, there are seven funds namely conservative hybrid fund, balanced hybrid fund, dynamic asset allocation fund, aggressive hybrid fund, multi asset allocation fund, arbitrage fund and equity savings fund. 

Within the category, Deepak Jain, President and Head - Sales, Edelweiss Mutual Fund advises investors to go for Balanced Advantage Funds as they turn out to be apt for investors who like to participate in the equity market but like lower volatility or drawdowns. Edelweiss Balanced Advantage Fund for instance has provided large cap like returns and almost half the volatility, 

Mutual Fund selection should be determined by the risk return objectives and investment time horizon of an investor. Market volatility is a part of investing and investors should be prepared to ride out volatility by staying invested in funds as per their asset allocation. 

“If markets have run up or corrected significantly, then a portfolio rebalance may be prudent to bring the overall portfolio allocation back to the desired asset allocation levels,” Belapurkar added.

How to cope up with heightened volatility when adding mutual funds to your portfolio?

To address persistent volatility, strategies like diversification, Systematic Investment Plans (SIPs), and maintaining a long-term investment horizon are recommended. Diversification plays a key role in balancing the impact of market fluctuations by spreading investment capital across various industries and sectors. 

SIPs help spread investment costs over time, reducing the impact of price swings. Long-term investing is vital for equity mutual funds to ride out market ups and downs and benefit from growth. For shorter investment periods, it's wise to allocate more to stable assets like debt or bond mutual funds, as they recover faster from market downturns, notes Sarvjeet Singh Virk, MD & Co-founder, Shoonya by Finvasia.