For investors across the world, the year 2020 seems to be a rollercoaster ride. The COVID-19-led pandemic has turned the global markets very volatile, with the Indian market being no exception. Right from being at an all-time high in January to witnessing a severe fall of about 23 per cent in March and from an unexpected recovery in April to a sudden correction in September, the investment journey in the Indian markets appears to be packed with unexpected twists and turns.
Within a few months, investors have witnessed both the extremes of the markets and many have been left with a sour taste in their mouth. No matter whether you think the worst is over or you're waiting for the other shoe to drop, it is quite baffling even for the most diligent long-term investors to predict the next market move and set the course of action accordingly.
Although we don't know what lies ahead, we can help you come out of this crisis, with your portfolio remaining not just intact but stronger. There will be uncertain times ahead but if you keep a cool head, you can avoid any great disaster. The following are some suggestions that can be taken into consideration.
Stick to principles
Every investor should religiously follow the basic principles of investment, irrespective of the situation. Time-tested principles help investors in good times as well as sail through the rough waters. Hence, look back at past market crashes and the lessons they taught us.
Timing does not work
During a crisis, it is impossible to predict whether the market has already reached its bottom or there is more room for a correction. Timing the market efficiently is an art that nobody has mastered yet. Even the biggest investors in the world struggle to predict what lies in the future. So, even the financial wizards of the world prefer going for a staggered entry into the market. No wonder, over the years, SIPs have emerged as a powerful investment tool.
The benefit of investing through SIPs has been observed in past crashes as well. Hence, this route is always preferred over the lump-sum route when it comes to investing in equity. Let's discuss it with an example. Two investors, Mr. Sharma and Mr. Verma had Rs 2 lakh each to invest at the start of January 2008. In anticipation of higher returns, they decided to invest in equity rather than any conventional saving instruments. However, while Mr. Sharma decided to invest all his money at one go, Mr. Verma being little apprehensive decided to invest Rs 10,000 a month for the next 20 months. Unfortunately, the market observed one of the worst falls over the next few months.
The graph, titled 'Staggered entry', shows the investment values earned by both the investors. While Mr. Sharma had a huge setback owing to his lump-sum investment, Mr. Verma's decision to invest through an SIP helped him average out the cost of investment, thereby helping him earn higher benefits.
proved their worth, it is equally important to have an exit plan ready so that an abrupt fall in the market doesn't leave you with a diminished corpus just when you need it. Especially for non-negotiable goals such as your child's higher education, any windfall can leave you at a tight spot if you fall short of the actual amount needed. Systematic Withdrawal Plan (SWP) is the opposite of SIPs and helps you exit the markets systematically. When you set up an SWP, a part of your accumulated corpus is transferred to your bank account at defined periodic intervals. So, you don't exit at one go, rather over a period. Just as SIPs help you average your investment costs, SWPs help you average your withdrawal. This ensures that you don't sell out at the bottom.
Investing in the markets is not for the fainthearted. A famous Wall Street advice on making money is to "Buy Low, Sell High." However, it takes a lifetime to learn this skill. Buying when there is blood in the streets is undoubtedly the most logical thing to do for wealth creation. However, investors tend to do just the opposite, as falling markets can give you the jitters but exiting the market at this time is sure to make your experience worse.
Thus, while the best thing to do in a crashing market is to invest, one should make sure not to exit the same. If you are a long-term investor, the ups and downs of the market should not make you anxious. Here is another example to illustrate this point.
Two brothers, Abhay and Aarav, inherited some money after the sale of an ancestral property at the start of 2000 and decided to invest the same. Soon after they invested the money in the market, the dotcom bubble took place and the markets crashed. While Abhay stayed invested, Aarav got anxious because of the falling markets and decided to exit the market as soon as his investments fell by over 20 per cent. He stayed out of the market and reinvested his money after the markets recovered by a minimum of 15 per cent from the time he had exited. He repeated this exercise every time the markets got volatile. Thus, while Abhay's investment grew to Rs 1.05 crore after 20 years, Aarav's fickle mind made him lose opportunities and his investments stood at Rs 75.60 lakh. This shows that patience is an important aspect of investment.
As a famous saying goes, don't put all your eggs in one basket. Diversification is probably one of the most important and fundamental requisites of successful investing. Avoid putting all your investments in a single fund or a single asset class. Building a diversified portfolio helps in ensuring that even if one of your investments is not faring well, the others can limit the losses, thereby mitigating the risk. Also, make sure that you have an asset allocation plan and rebalance your portfolio periodically to stick to it.
While equity can help you gain superior returns, the debt component provides stability to your portfolio, especially during challenging times. Hence, a combination of these two based on your risk appetite and age should give your portfolio an ideal risk-return composition.
Adding components such as international equity can also be considered to enhance your portfolio. International funds give you access to different geographies and an opportunity to invest in pioneer companies across the globe. Hence, a small yet meaningful allocation to these funds can come to your rescue when the Indian economy, in particular, is facing turbulent times because of any domestic factors.
Invest in quality
A series of downgrades and defaults in debt-fund portfolios have shown that even debt funds aren't free from any risk. Hence, it's important to thoroughly scrutinise the funds you wish to invest in. Don't be lured by a fund's performance or past returns. Instead, focus on the quality of the portfolio. To generate mouth-watering returns, debt funds assume credit risk but that can backfire. The recent closure of six of Franklin Templeton's debt schemes was an outcome of the exposure of the schemes to low-quality bonds which turned illiquid.
First things first
While investments are important, there are some things that take priority over investments. The year 2020 has been something never seen before. From the widespread pandemic and natural disasters to the fastest stock market decline in history, disruption in business models, rising unemployment and falling GDP, the year is beset with lots of challenges. To stay prepared for the worst, one should take care of the basics.
Adequate life and health insurance
Uncertainties of the last few months have only highlighted the role of health and life insurance in your financial plan. A health cover for you and your family goes a long way in protecting your savings in the case of a disease. If you have financial dependents, you must buy a life-insurance cover in your name to safeguard their future in your absence.
Have an emergency corpus
Emergencies come unannounced and can take a toll on your overall financial plan and savings. Hence, it is essential to build a sufficiently large emergency corpus before you start investing. There is no fixed rule for how much you should keep aside for emergencies. Normally, your emergency corpus should be sufficient to take care of your six-month expenses. However, given the current scenario and the prevailing uncertainty, maintaining an emergency corpus to take care of your one-year expenses isn't a bad idea. You can keep part of it in your savings bank account for easy accessibility and the rest in good liquid funds.