Using Market Volatility to Your Advantage with Direct Mutual Funds

Volatility is a natural part of the market cycle—but while many investors see it as a threat, smart investors know how to use it to their benefit. If you’re managing your own portfolio with direct mutual funds, you already have one advantage: lower costs. Add a second layer—rebalancing during drawdowns—and you could boost your returns without increasing your risk.

Understanding Market Volatility

Markets never move in a straight line. Corrections, crashes, and rallies are all part of long-term investing. Volatility, or the up-and-down movement in asset prices, is often misunderstood. Instead of fearing it, investors should understand that volatility presents opportunities—especially to rebalance portfolios and capitalize on lower valuations.

What is Rebalancing?

Rebalancing is the act of resetting your portfolio back to its original asset allocation when market movements cause it to drift.

For example, let’s say your intended asset mix is:

• 70% equity mutual funds
  
• 30% debt mutual funds
  
  

Now imagine there’s a sharp 20% correction in equity markets. Your portfolio may now look like:

• 60% equity
  
• 40% debt
  
  

This is the time to buy low by reallocating some of your debt investments back into equity to restore the 70:30 balance.

Later, if markets rally and equities rise to 80%, you would sell high, moving some gains to debt and protecting your downside.

Why Direct Mutual Fund Investors Are Better Positioned

When you invest in direct mutual funds, you:

• Avoid distributor commissions
  
• Have complete control over your asset mix
  
• Can act quickly without intermediary delays
  
• Pay lower expenses, leaving more money to compound
  
  

Most importantly, you’re more empowered to take advantage of rebalancing opportunities, especially during market dips.

Rebalancing Through SIPs

Even if you’re investing via SIPs, you can use market volatility to your advantage:

• Increase SIPs in equity funds when the market dips.
  
• Pause or reduce debt SIPs temporarily to redirect flows into underperforming assets.
  
• Avoid stopping SIPs out of fear—volatility is exactly when SIPs work best by buying more units at lower NAVs.
  
  

Rebalancing doesn’t always mean selling. It can also be done through differential SIP adjustments to restore the desired asset allocation.

Example: Rebalancing During a Drawdown

Let’s say:

• You had ₹7 lakh in equity and ₹3 lakh in debt (70:30 allocation).
  
• A 20% equity fall brings equity value down to ₹5.6 lakh.
  
• New ratio: 65% equity, 35% debt.
  
  

To rebalance:

• Move ₹40,000–₹70,000 from debt to equity to restore 70:30.
  
  

When markets recover, you’ll benefit from buying equity at a lower NAV—amplifying your gains in the long term.

Common Mistakes to Avoid

• Panic selling during dips – It locks in losses.
  
• Ignoring asset drift – Leads to overexposure to risk or missing out on upside.
  
  

Over-rebalancing – Don’t rebalance every small fluctuation; stick to annual or semi-annual reviews or when the asset allocation drifts by more than 5%.