It’s time to prepare an investing strategy for a post-Covid-19 world
The coronavirus outbreak across the globe has led to high market volatility, with sharp movements on both sides. Amid the flight of FII investments, India VIX touched its all-time highs recently. The sharp corrections on account of Covid-19 disruptions led to a 23 per cent fall in the NSE Nifty 50 during March 2020 and an overall 26 per cent fall over the last one year.
However, amid all the market chaos and volatility, the investors must ignore the daily price movements and focus on their long term goals. While pressing for redemptions to prevent further loss will convert the notional losses into real losses, staying invested will enable them to participate in the stock rally as and when the markets recover.
Till now most conversations on investments revolved around equity investment while other asset classes generally took a backseat. Staying focussed on equities may have dealt a severe blow to most portfolios. It is always advised to diversify across asset classes and not put all your eggs in the same basket. This is important as different asset classes tend to react differently to the same macroeconomic event.
While equity markets have been hammered during the past month resulting in high negative returns for the investors during fiscal 2020, debt (as seen in the Crisil 10-year Gilt Index) generated 14.55 per cent returns during the same period.
Similarly, gold has also given spectacular returns of 38.55 per cent during this period. Therefore, investors need to review their portfolio and rebalance for the desired asset allocation strategy. The current events gives us a good opportunity to do a course correction in our portfolio, if needed.
However, the recency bias often tends to impact the investment behaviour of investors significantly. While the inherent optimistic investor may like to stay positive on the long-term growth outlook, the recent negative performance of the investments tends to cloud such optimism, and the investor might prefer to allocate a higher proportion to the investments that have performed well recently.
As such, debt and gold may take a significant proportion of the incremental investments under the current circumstances. However, one must not go too conservative on the equities side and go all out for debt, especially for their long term financial goals.
Even within the equity allocation, it would be prudent to invest into the companies with fundamentally strong balance sheets, who are likely to withstand this storm in a better manner and can also be expected to lead the market recovery, as and when the situation normalises.
Choose a basket
However, instead of choosing select companies, it might be a better option to place a bet on the overall basket of market leaders and strong performers which form a part of the benchmark indices. Such a passive investment strategy also helps the investors to mitigate the unsystematic risk or the risk of selected bets going wrong. As such, the investor can consider investing in index funds and index ETFs, such as Nifty BEES. Further, the lower expense ratios for index funds and ETFs make the overall returns more favourable to the investors compared with active investment funds in the absence of an alpha.
Additionally, the economic disruption because of the lockdown is also expected to impact the cash flows for several individuals, who might suffer from temporary disruptions of income because of delayed salary payments, low salary hikes and delayed bonuses.
At the same time, regular and recurring expenses will continue. As such, the current times of uncertainty have also brought the spotlight on the importance of an emergency fund corpus. It is generally advised that one must maintain an emergency corpus of at least six months’ expenses for the rainy times.
If you have not maintained an emergency fund till now, make sure you steadily create an emergency fund once the situation is back to normal. Such an emergency fund can be invested in liquid funds to maintain liquidity while giving the investors a better return than savings bank accounts.
The current coronavirus crisis may be seen as a reset button for your investment strategy wherein you review it religiously and get back to the fundamental investing principles in the pursuit of your financial goals. Stay safe and happy investing!
The writer is ED and CEO, Nippon India Mutual Fund