Economic headwinds unleashed by the Covid-19 pandemic have stormed the world since early last year. The mounting economic losses for of the nation have trickled down to the personal finance of every individual. Worries over protecting whatever we are left with from further damage intensified inexorably after the outbreak of the second wave of the pandemic this year.
This too shall pass – the words of solace fall flat when every morning greets us with the news of lakhs of people being choked and thousands of lives being lost – unless we try to see the other side of the fiasco.
“In fact, this is a rare opportunity to hone up your financial skills,” says Palka Chopra, Senior Vice-President of Master Capital Services. “This is the time when you need to give an intense relook into your finances and revisit all your decisions to learn from your mistakes.” Her firm positions itself as a trusted partner with the right set of tools, knowledge and experience to guide its clients through the complex mosaic of the financial markets.
We may not circumvent the crisis but with fiscal discipline we can navigate in the right direction with minimum threat to our life’s savings. The learning in this trying time will, experts believe, help us plan our future better and work towards a more robust protection against unforeseen crises.
The second wave of the pandemic has found the people somewhat guarded on the fiscal front, compared to a year back, when the virus had launched its maiden onslaught. Market experts had predicted that the impact would be heterogeneous, asynchronous and less enduring but certainly not trivial. The toll on the financial markets this time was indeed less devastating with most asset classes showing low to moderate effect.
The equity markets scaled record highs, of course with some inescapable volatility, at a time when large swathes of India went under partial lockdowns. Commodities stabilised, though crude prices spiralled on global cues, and metals regained their glory. Banking, financial services and insurance sector, too, showed remarkable turnaround, aided by prudent decisions of the central bank. The markets have sufficient liquidity to thwart any major blow to the economy, although most agencies have lowered the economic growth forecast for the country for 2021-22.
“Unlike the first wave, the second wave is a known event. Although the intensity of the spread could not be ascertained, there is lower probability of any major correction like in March 2020,” says Prasanna Pathak, Head of Equity and Fund Manager at Taurus Mutual Fund, one of the earliest mutual fund houses to be registered with the Securities and Exchange Board of India (Sebi).
As India rides through the second wave and braces for a third round of rampage by the Corona virus towards the end of this year, the people have learned the need for an emergency fund in the hardest way. “Building an emergency fund and having adequate health insurance should be the top priority,” says Abhinav Angirish, Founder of Investonline.in, which claims to be a leading platform for mutual fund investments. “Make sure that your emergency funds are liquid or easily redeemable. Even if one has a group health insurance, it is important to get adequately covered through super top-up plans for yourself and your family.”
A top-up plan increases the insurance coverage over and above your existing base policy at a comparatively lower cost as compared to increasing the sum assured in the base policy.
Given the uncertain circumstances the country is going through, it is prudent for everybody to keep enough liquidity in hand and have enough provisions covering for at least six months of liabilities plus medical emergency reserve, in case of a job loss. To ease the liquidity concerns, one can avoid investing in long-term fixed deposits (FD) as they attract penalty in case of pre-mature withdrawal.
Recurring Deposits (RD), where you deposit a small amount of money with your bank at regular intervals, seem to be a better option as a hedge against exigencies. They are more liquid than FDs. “Investments in liquid funds can also be done, as the investment horizon itself is short up to 90 days, thus adding to the overall liquidity in case the need arise in near term,” says Prashant Joshi, Co-founder and Partner at Fintrust Advisors. The boutique wealth advisory firm provides personalised, transparent, unbiased and research-driven expert advisory services.
“I would advise investors to never put all your money in one asset class,” says Chopra. “If one of your asset classes is underperforming, the losses could be balanced out to some extent through better returns generated by another asset class.”
The key to managing finances in a critical juncture like the Covid-19 pandemic lies in diversification of assets. You may start by investing a little and ensure that you have diversified your wealth across major asset classes or across major regions or sectors. These could be equities, debt, mutual funds, bonds, cash or gold. An effective wealth management policy helps you identify which asset classes to consider, in what proportion to distribute your funds, and for what tenure of investment. But the underlying principle is you must align your investments to your financial goals, risk appetite, liquidity requirements and corresponding return expectations.
While the ups and downs in the economy cannot be controlled, diversification helps to limit or minimise the impact on your portfolio, according to experts. In case of a medical emergency or some other unforeseen crises like loss of job or loss of income, there is an urgent need for cash.
This is again a cause for concern in an uncertain phase like this. It is not advisable to keep emergency cash at home as sooner or later one would be tempted to spend it. One should also look beyond savings accounts to park her money. But what if you need money as soon as possible?
“Instead of parking the funds in savings account, one must invest in liquid funds which offer safety as well as decent returns,” says Angirish. Liquid fund is an open-ended debt mutual fund scheme, ideal for short-term investments, which invests primarily in money market instruments like certificate of deposits, T-Bills, commercial papers and term deposits. Withdrawal requests are processed very quickly in case of liquid funds.
“Within debt, please look at quality of the debt – which can be assessed by the rating and servicing ability – for your investment in this asset category,” says Rajesh Cheruvu, CIO at Validus Wealth. His firm offers wealth management advisory services to individual and corporate clients.
In fact, excluding the liquidity aspect, the investor can use the MF universe based both on calculating her needs and risk appetite. Mutual Funds offer the entire bouquet of funds with various risk and reward matrices such as money market funds, liquid funds, government securities funds, debt funds, balanced funds, hybrid funds, index funds, exchange traded funds, fund of funds, gold funds, large, mid, small, multi and flexi cap equity funds, arbitrage funds and international funds.
“From the MF spectrum, the types with the lower risk and high liquidity are money market, liquid and arbitrage funds,” says Pathak. Investors, especially with dependent family members should keep a lower allocation of risky assets, and keep higher allocation towards FDs, PPFs, and other saving schemes, which are safer investment options.
“Equities being a longer-term asset class could be seen as an opportunity in the current price corrections. Midcaps offer superior earnings outlook over large caps in 2-3 years, valuations too relatively attractive, hence suggest overweigh midcaps,” says Cheruvu.
An effective and well-thought-out investment blueprint helps you avoid common mistakes like failing to diversify, attempt to market timing, chasing returns without focus on fundamentals, taking large cash calls and not having a risk management mechanism for the portfolio. “In terms of re-organisation, one should relook at her investment portfolio and look for investments where there could be a possibility of a permanent damage from the pandemic and try to move out of such exposures in the portfolio,” Nath says.
Remember that in such times, an investor should concentrate on matters that are in her control, and the top of the table is her mind. “You must let your mind overwrite what your hear decides. The heart can compel you to make the decision based on emotions, instead of fundamentals of investments. Simply try and avoid watching the market daily as this can cause anxiety,” says Chopra.
Besides building a fiscal hedge, the most undeniable part of accurate financial planning is wealth creation, according to experts. When it comes to that, the key lies in the blueprint for its protection and preservation. The overwhelming uncertainty has made it mandatory to maintain the right temperament and work out a well-defined investment strategy. “Ward off any emotional or knee-jerk reactions, as they may seem illogical in retrospect,” says Prashant Joshi, Co-founder and Partner at Fintrust Advisors. The boutique wealth advisory firm provides personalised, transparent, unbiased and research-driven expert advisory services.
A crisis situation often prompts people to stop their investments and save as much as possible. This is more common among those who do not have a proper investment cover. A disciplined approach to investment and to asset allocation is the best solution. A Systematic Investment Plan (SIP) takes care of market volatility and cycles.
In fact, cycles is the key word here. An event like a pandemic is a passing phase, while the markets and the economy are cyclical in nature. There are troughs and peaks and everything returns to its mean position. Such events offer excellent investment opportunities. Studying past data, events and cycles can help us predict, prepare and pre-empt for the worst. “Do not rush to book losses or stop your SIP due to volatility,” suggests Angirish. “You must consult a qualified financial planner before taking investment decisions.”
The worst mistake we end up with is being short-sighted while making investments in a difficult situation. We concentrate on near-term gains while making long-haul investments. “Such myopic decisions leave us in a more precarious situation of losing out on returns. Patience is a must in such trying times. You must hold on to your investments with a long-term view and wait for the turnaround,” says Raghvendra Nath, Managing Director, Ladderup Wealth Management, an independent private wealth management and investment advisory firm catering to a clutch of high-value clients.
One of the commonest mistakes that investors are prone to making in a challenging time is not caring much about their spending habits. People prefer to liquidate their investment first, rather than analysing their spending habits and cutting down on unneeded expenditure. A little bit of tweaking in spending pattern can save their investments made out of hard-earned money and help them protect their financial goals.
The Covid-19 pandemic has had a devastating run on the economies and businesses worldwide. From pay-cuts to job-losses and from shuttered-down businesses to rock-bottom revenues – the viral disease has hit families and dented household incomes. Savings have taken a major hit and investments have faced brunt. Experts still believe that this is the right time to recast your financial strategy and sharpen your financial management policies.
Gold Remains the Safe Haven
With the second Covid wave hitting hard, the flight to safety has again pushed the demand for gold and the retail prices have bounced back to near Rs 50,000 per 10 gram. You can invest in gold in current times, just keep in mind the capping mentioned.
“It is always prudent to have at least 10-20 per cent of your portfolio in gold,” says Prashant Joshi, Co-founder and Partner at Fintrust Advisors.
You can invest in gold through various routes such as gold mutual funds, gold exchange traded funds and sovereign gold bonds. The Gold ETF aims to track the domestic physical gold price. They are passive investment instruments based on gold prices and invest in gold bullion. Investing in Gold ETFs comes with advantages like no storage cost, no purity and theft concern, as they are kept in safe vaults.
Sovereign gold bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. Gold funds are a type of mutual funds that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates, physical gold, and on stocks of mining companies.
“The sovereign gold bond comes with a maturity period of eight years. If you are looking at a long-term investment, then you should consider gold ETF over gold mutual funds as it is a cost-effective avenue,” says Palka Chopra, Senior Vice President, Master Capital Services.
Greener Pastures Overseas
The writer is a financial journalist