While market volatility remains unpredictable, unsettling and hard to navigate, it’s a natural part of investing, especially in emerging markets like India. Understanding the psychological traps that accompany volatility can help investors make more informed decisions and stay the course.
Behavioural tendencies
We are wired to react more strongly to losses than to gains, a phenomenon known as loss aversion. When markets dip, the fear of losing money overshadows the potential for future gains. This emotional response leads to herd behaviour, where investors sell off assets in panic, amplifying market downturns.
For example, the Nifty 50 saw a significant decline of about 15% from its September 2024 peak to its lowest point in late February 2025, due to weak corporate earnings, sustained outflows from foreign investors, and uncertainty surrounding US tariffs, which collectively pushed the market to its worst performance in nearly 30 years at that time. During the same period, the mutual fund systematic investment plan (SIP) stoppage ratio surged to 122.76% in February, up from 109.15% in January 2025, as more investors chose to discontinue their SIPs rather than start new ones.
During such times, the instinct to follow the crowd can be overwhelming, but it’s essential to remember that markets are cyclical, and downturns are often followed by recoveries.
According to the India VIX, volatility is currently at 12.5% and has been easing steadily since June 2025. Looking back from January 2019 to October 2025, volatility crossed the 25 mark on 139 occasions, reflecting heightened market instability, marked by several major global events and the pandemic.
The sharpest spike came during the covid period (March-June 2020), when it shot up to as high as 85%. Other notable jumps were during the Russia-Ukraine conflict in March 2022 (27%) and the 2024 general election results (25%). Budgets, which once triggered volatility, e.g. 2022, have become less eventful of late, with average volatility on budget days holding at around 13.7% since 2023.
Volatility highlights common behavioural tendencies in investors, which have a significant impact on the psychological aspects of investing.
Common mistakes
Investors often fall into common psychological traps that can hurt long-term returns. One frequent mistake is overreacting to short-term market movements. Reacting impulsively to such volatility can cause investors to miss out when markets rebound. An investor should always look for pockets of value and capitalize on the volatility presented by implementing staggered buying.
Another pitfall is chasing performance. In 2025, the technology sector rallied as IT services companies reported strong earnings, while the broader market remained relatively flat. Investors who jumped in solely because of recent gains often ended up buying at high valuations, exposing themselves to greater risk when momentum slowed.
One has to be aware of the benefits of long-term investing. While timing the market may seem tempting, staying invested through market cycles allows investors to benefit from compounding and smooth out short-term swings. A quick look at the performance of Indian equities over the past two decades shows average annual returns of 12-14%, underscoring the value of a disciplined, long-term approach.
Investors need to be aware of the drawbacks of emotions like fear, greed, and impatience as they override strategy, leading to frequent portfolio changes, higher trading costs, and ultimately weaker returns. Keeping a steady hand and sticking to a well-thought-out plan is often the key to navigating market volatility successfully.
Understanding volatility
Understanding volatility begins with having a clear perspective. Markets naturally fluctuate, and historical data show that recoveries often follow declines. For example, after the market correction in early 2025, Indian equities rebounded, with the Nifty 50 gaining over 10% by mid-year. Investors who stayed invested during this downturn were able to benefit from the subsequent recovery.
Volatility is not inherently negative; it can also present opportunities for long-term investing and wealth creation. For disciplined investors, market swings present opportunities to acquire high-quality assets at attractive valuations. By focusing on companies with strong fundamentals, solid growth prospects, and robust business models, investors can capitalize on market movements. The key is to separate noise from meaningful signals, maintain a clear perspective, and adhere to a long-term strategy. Understanding the psychological pitfalls of investing helps avoid common mistakes such as panic selling, herd-following, or chasing trends.
Patience, discipline and perspective can transform fear into opportunity, ensuring that short-term swings do not derail long-term goals. By recognizing the psychological challenges of market volatility, investors can stay focused, avoid costly mistakes and steadily build wealth over time.
The author is a managing director at Emkay Global Financial Services Ltd
