Stop Managing Volatility, Start Making It Work for Your Portfolio

Volatility is often treated as a problem to be managed or avoided. In reality, it is a defining feature of equity markets, particularly in segments outside the largest companies. Mid and small-cap stocks, which make up the universe beyond the top 100, are characterised not only by higher growth potential but also by sharper, more frequent price movements.

This duality presents a paradox. The same volatility that creates opportunity also introduces risk. For many investors, the experience is familiar: strong gains during favourable phases, followed by equally sharp corrections that erode a significant portion of those returns. Over time, the challenge is not participation, but consistency.

Part of this inconsistency stems from behaviour. Markets are not driven purely by fundamentals; they are influenced by cycles of optimism and pessimism. Periods of excitement and euphoria often lead to aggressive positioning near peaks, while phases of fear and anxiety trigger exits near troughs. The result is a gap between market returns and investor returns.

Traditional long-only strategies offer limited tools to address this. By design, they remain fully exposed to market movements. Investors benefit when markets rise, but must endure drawdowns when they fall.

Specialised Investment Funds (SIFs) introduce a different framework - one that focuses less on predicting market direction and more on structuring portfolios to navigate varying conditions. Within the SIF framework, strategies such as long-short investing, arbitrage, and options-based approaches can be deployed alongside traditional equity exposure.

The significance of this lies in diversification, not just across assets, but across return drivers. A long-short strategy, for instance, allows a portfolio to benefit from both rising and falling stocks. Instead of depending entirely on market momentum, it can generate returns from relative differences between companies. Similarly, hedging strategies can reduce the impact of broad market declines, while arbitrage and options strategies can introduce more stable, non-directional income streams.

This multi-layered approach becomes particularly relevant in the Ex-Top 100 universe. The breadth of companies in this segment creates a wide dispersion of outcomes. Some businesses outperform due to strong fundamentals or favourable trends, while others lag due to structural or cyclical challenges. Volatility, in this context, is not random, instead it reflects underlying differences that can be systematically analysed and acted upon.

SIFs provide the flexibility to engage with this dispersion. They enable investors to participate selectively in upside opportunities while mitigating downside risks through short positions or hedging mechanisms. The aim is not to eliminate volatility, but to reshape its impact on portfolio outcomes.

This leads to a subtle but important shift in how returns are evaluated. Instead of focusing solely on absolute performance, greater emphasis is placed on consistency, drawdown control, and risk-adjusted returns. The objective is not just to grow capital, but to do so with a smoother trajectory.

As markets deepen and participation broadens, volatility in the Ex-Top 100 segment is unlikely to diminish. If anything, it may become more pronounced as capital flows respond rapidly to information and sentiment. In such an environment, the question for investors is not whether to engage with these opportunities, but how.

SIFs offer one answer. By expanding the toolkit available within a regulated structure, they allow for a more deliberate approach to investing, one that treats volatility not as an obstacle, but as a resource to be harnessed.

Disclosure: This article is written by Saibal Biswas, Mutual Fund Distributor. The views expressed are his own. This is partner content and not an Outlook Money editorial feature. Outlook Money does not provide investment advice or endorse any products or services mentioned.

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Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature