In troubled times such as the present one, the urge to do ‘something’ to make your money work better is high. Here are some of the questions I received frequently, reflecting the above sentiment, and my corresponding suggestions.
“I have some surplus to invest now, where should I invest for high returns?” Having some surplus does not automatically qualify it for risky, long-term investments in these hard times.
The COVID-19 pandemic may take time to resolve; some of us may have pay cuts and worse, some may lose jobs. If that be the case, be happy that you have some surplus and earmark the same as a contingency fund.
At least six to nine months of your expenses are best set aside in these extraordinary times. Stash much of this money in savings accounts and short-term bank deposits (of large scheduled banks) that you can break. Overnight or liquid funds should only be your next choices. Please stop bothering about the interest it earns, until such time we get over this current crisis. In other words, near-term survival and sustenance matter first.
EMI payment
“Should I stop paying my EMI and use the money to invest?” No, this is not a good idea. First, there is no free moratorium. Your interest will get added over the three-month period. If you have enough money for your daily needs, avoid skipping the EMI. Second, in such a dicey market, the last thing to do would be to ride the market on borrowed money hoping the market will generate quick returns.
“[The] RBI is cutting the interest rate. Should I lock into higher-earning deposit options?” Higher earning options do not come without risk in normal times. They come with heightened risk in these risky times. Stay clear of any kind of credit risk if you are dependent on your investment for regular income. Good old small savings schemes will offer slightly better interest rates than bank FDs, especially for senior citizens, even after the recent rate cut. There are select, quality low-risk options in debt mutual funds that you can explore if you have other sources of income.
“Markets have fallen sharply. Can I buy some stocks now?” If you are a seasoned stock investor, then you might find opportunities in quality stocks that you are already invested in and accumulate those.
If you are new to stock markets, then trying to buy when markets fall can be like catching a falling knife. Instead, add more to your mutual funds or simply use index funds or ETFs and keep accumulating in 6-8 small instalments and slowly deploy every week. Make sure this is money you don’t need for 3-5 years at least and you have enough debt allocation in place. Avoid wasting your time asking friends or even experts whether this is the correct time to buy. Nobody really knows.
“Small-caps have been hit badly. So, they may bounce back fast. Should I shift to smaller companies?” This is not the kind of correction where stocks that fall the most bounce back the highest. The present crisis will lead to a question of survival of the fittest as stressed working capital and poor sales would threaten companies with weak finances.
Also, previous market falls have taught us that some stocks and sectors go out of fancy when a new rally starts after such major corrections. This may mean that stocks that you eyed in the earlier rally may completely lose out and fade into oblivion, at times. Unless you track smaller companies and their financial strength closely, stay with quality companies that are cash rich, are known to emerge from downturns and are currently at a double-digit discount to the prices they were in a bull market.
Equity investment
“All my equity investments are below my cost after 5 years of investing now. What is the point in investing in equities?”
Social media comments on 5-year SIPs turning negative, 5-year FD returns or liquid funds being better than equity at present... are all true. But just 2.5 months ago, there would have been no case to make. Also, nobody speaks of the bounce-back that happens not far after the hit. My point is, get to know how you could have mitigated it. The answer is asset allocation. Some equity, some debt, some gold and so on. If you had done this, then please a look at your portfolio in its entirety and not just your equity. You will still be better off.
When you have asset allocation in place, an annual check will tell you whether the allocation needs to be rebalanced — that is, bringing your asset proportion back to your original allocation if an asset class swells. For example, if your 60:40 equity: debt portfolio has grown to 70:30, you need not know anything about the markets. You simply need to know your equity allocation is inflated and bring it back to 60:40. Such re-balancing will indirectly help you book profit in the inflated asset and redeploy in the deflated asset class (debt, in our example).
This way, in steep falls, your portfolio is better protected, and you would already have reaped some profit and shifted it out, without knowing whether markets may rise or fall.
Stay safe, invest right!
(The author is co-founder, Primeinvestor.in)
