Keep a cool head and gear up for high returns

Keep a cool head and gear up for high returns

The notion among investors in March was that all around the world, there will be a global recession, and the stock market would crash because of unprecedented proportions. One half of this prediction, much to everyone’s surprise, has been proven wrong. Though there was a crash, a smart recovery followed. Will the other half also prove itself to be false now? 

Or will both the parts come true?

Honestly, at this point, no one knows the answers to these questions. What is clear is that businesses and economies around the world are in a bad state right now. People are suffering, so are businesses, and the efforts by the government will light the flames for all future problems. No country can fund an escape route from this situation. 

However, an individual saver and investor can easily come out of the crisis, and that too with a portfolio that is stronger than before. Times ahead will of course be uncertain, but if you keep your calm, there will be no great disaster for you. 

Here is what you should be doing.

Investors across the globe are wondering about the right course of action for now. The best thing to do right now: nothing. And this holds for the smallest to the biggest investor in the world. 

Even the diaries of Charlie Munger and Warren Buffett are blank. In a recent interview with the Wall Street Journal, Munger spoke about how Berkshire Hathaway is not considering any investments right now. Even though the have the largest cash holding in the world, about INR 10 lakh crores, and assets are going cheap; they are not taking any action. This is a situation that no one understands. Thus, it is best to sail through with all liquidity intact, rather than to delve into something unseen and then regret it. The best course of action right now is to stay where you are and do nothing at all. 

Ever since the coronavirus hit, there have been investors who want to redeem their funds; and then run away whenever the market crashes or recovers. In fact, in times like this, when the market moves up and down, investors are the most tempted to try and do some market timing. 

To many, this seems like a missed opportunity. They could have well sold when the news of COVID hit, bought when the first sharp fall was over, sold again in May, and then bought back again. Of course, a fortune could be made by exploiting the sharp and quick ups and downs in the market. 

Only, this is not the case. Timing does not work here. The only way to make good money from stocks is to choose a good business, and then invest in it for a long time. In the coming months, a lot of businesses will perform poorly, but the good ones will perform well. 

A misty landscape ahead

If you seek, you will find it. There is no dearth of negative news around us, but there is reason to be hopeful too. As per IMF, India could be one of the major economies that will witness major GDP growth later on in the year. Of course, even the IMF is guessing just like everyone else is; but a lot of other economies are estimated to contract. 

The government is also continuing with its efforts to combat the effects of the pandemic. Optimists here are looking at the new trends that will soon gain momentum. For instance, technology has got a boost during the lockdown. This will transform the way we work and connect. In the long run, this will lower the operating costs and lead to higher efficiency. 

Another hot topic is the shifting of production from China to India. It is but natural that countries now will seek to reduce their dependence on China, and India will benefit partially from this. 

The normal monsoons, as predicted by the Meteorological Department, will also help to douse the fire that the pandemic has ignited. As per recent economic data, the rural economy has been largely unaffected by the lockdown. 

The pandemic and the lockdown has had extensive impacts on investors. They are dealing with not just unreasonable market movements, but also with a loss of income. 

However, strong investors are born only in difficult times. 

No one can predict the extent of the damage caused by the pandemic, or when a permanent solution would be available. What we can do is prepare ourselves better and gear up. 

Here is what you need to be doing. 

Build an emergency corpus

Emergencies do not tell and come and can leave a toll on your intended financial plans and savings. Therefore, even before you start investing, work on building an emergency corpus for yourself. There is no fixed amount that you need to set aside for emergencies. Normally, your corpus should be enough to help you sail through for six months. However, considering the present-day scenarios, building a corpus to help you out for a year is not a bad idea either. Keep a part of it in your bank account, so that you can access it anytime. Invest the rest in good liquid funds. 

Get health and life insurance for yourself

The recent months have well highlighted how important it is to have adequate life and health insurance covers. In case of a disease, if you have a health cover, you and your family will be protected from spending all of your savings. And if you have financial dependents, buy a life insurance cover in your name. This will safeguard their future.

 Be disciplined

It is very important to stay on track and be disciplined, especially when it comes to spending habits. And this is all the more important for those who otherwise find it difficult to save. Do not borrow money unnecessarily, and avoid credit card overdue. 

Be aware of your asset allocations

The term might sound very fancy or complex, but it is fairly simple indeed. It simply means dividing your money correctly between equity and debt. And instead of trying to figure out what your ideal equity and debt split should be, invest according to the time horizon. The asset horizon will itself take shape. 

Break down the financial goals across these three-time spans, and then plan as is described. 

  1. Near term goals

In the short term, safety comes first. Short term goals are the ones that are due within the next three years. Thus, safety and liquidity are very important here. Returns should be a secondary consideration here. 

For these goals, you can invest in top-quality liquid, short-duration funds, and overnight funds. 

Even debt funds are not free from risks, as the series of downgrades and defaults in debt-fund portfolios show. Thus, pay extra attention to the fund selection process. Don’t be tempted by past returns, or performance. Debt funds assume credit risk, but this can backfire too. Take the closure of Franklin Templeton for instance. That was an outcome for the schemes’ exposure to low-quality bonds, with then turned illiquid. 

Check the underlying portfolio of a debt fund for safety. Funds that are invested in AAA or A1+ papers have a high safety quotient. On the other hand, if the portfolio is invested in instruments that are rated AA or below; they are probably assuming more risk to give higher returns.

  1. Medium-term goals

Medium-term goals are three to five years away. This set of goals is the trickiest of the three since one has to strike a balance between safety and returns when investing. Most investors are tempted by extra returns and thus go for equity. But this can become an expensive mistake later on. 

If the market collapses immediately, you will be left with nothing but a diminished corpus when you need it the most. Moreover, you won’t even have enough time in time to allow the market to recoup your losses. Thus, do not make the mistake of investing in equity to meet your medium-term goals, considering the present situation of the market. 

No one knows when the danger of the pandemic will subside, and till then, there will be a lot of uncertainties. 

For your medium-term goals, opt for equity saving funds. These funds invest one third in equity, one third in arbitrage, and the rest in debt. Because equity and arbitrage are at least 65 percent, from the taxation perspective, these are treated as equity. Arbitrage and debt allocations give you steady returns, while equity will boost your overall returns. 

  1. Long term goals

These goals are five years away; and equity is the best suited for them. Equity will help you beat inflation, and also compound your wealth. This will then help you accumulate the required amount in the long term. 

Considering the lows in the market, this is a good opportunity to boost your long term returns. The current business and the economic environment are full of uncertainty, looking at history, the economy not only recovers but also resumes its upward march in the long term. Thus, equity investors need to be optimistic. 

Don’t jump into stock-picking directly. Instead, take the mutual fund route. Invest through SIPs; and do not invest large amounts of money, considering that the market has hit a bottom. On the other hand, don’t rush too much either, looking at the sharp market recovery. Investing in equity is more about patience than timing. SIPs will help to average your investment cost, and you will not have to worry about the market levels either. 

Multi-caps are the best equity funds to invest in. Since these invest in companies of all sizes, they leverage the opportunities available.