CHASING GAINS, MISSING OPPORTUNITIES: THE PSYCHOLOGY OF MARKET VOLATILITY

The Indian market in 2025 has had three chapters. It began with sharp volatility from valuation corrections and geopolitical uncertainty, then saw a recovery-led rally driven by strong financials, large-cap gains, and modest FII inflows over four months. Volatility has returned amid tariff worries and FII outflows. While unpredictable and unsettling, market swings are natural, especially in emerging markets like India. Recognising the psychological traps of volatility can help investors stay informed and maintain course.

- PRAKASH KACHOLIA

Behavioural tendencies: We are wired to react strongly to losses than gains, a phenomenon known as loss aversion. When markets dip, fear of losing money overshadows potential future gains. This emotional response leads to herd behaviour, where investors sell assets in panic, amplifying downturns.

For example, the Nifty 50 fell about 15% from its September 2024 peak to its lowest point in late February 2025, due to weak corporate earnings, sustained foreign investor outflows, and US tariff uncertainty, pushing the market to its worst performance in nearly 30 years. During the same period, mutual fund SIP stoppage ratio rose to 122.76% in February, from 109.15% in January, as more investors chose to stop SIPs rather than start new ones.

During such times, the instinct to follow the crowd can be strong, but it’s essential to remember that markets are cyclical and downturns are often followed by recoveries.