A few months after people make New Year resolutions, we see jokes and social media memes on how the previous year was better. This time around, it is true. 2020 has been sombre for much of the world, and we aren’t even halfway through it. So how should you invest at a time like this? We look at some time-tested principles behind smart investment with a few changes for the remainder of 2020.
Emergency fund and insurance are essential
Today, many are at the risk of losing their job or taking a pay cut. Hence, first things first: Do you have enough money to take care of expenses for at least six months? If not, you should try to budget yourself and build this emergency fund.
However, your emergency fund need not (and shouldn’t) be stashed away under your mattress. You can spread it across your salary or savings account, a plain old Fixed Deposit that can be withdrawn easily, and a liquid fund that allows instant redemption.
It takes years to build wealth and a few unfortunate moments to lose it. While insurance is not strictly an investment, it serves as a protection for those who depend on you. At a time like this, you need insurance more than ever.
You can grow your money by investing in real estate, gold, wine, and even antique paintings. But for most people, a hassle-free smart investment path to make money is through mutual funds.
Admittedly, some investors have lost some money and faith in mutual funds. The recent shutting down of Franklin Templeton’s debt funds and the Sensex crash didn’t help matters either. Despite these, I feel that Mutual Funds are the best choice under the current circumstances. There is an unmissable disclaimer ‘Mutual funds being subject to market risks’. Many who faced losses failed to understand the risk they ‘could take’ versus the ‘actual risk’ in their investments.
Before you invest in mutual funds, you need to invest some time in understanding it. However, that shouldn’t discourage you from investing in them. After all, we don’t stop driving just because accidents take place on roads. A mutual fund is ideal for beginners as well as experienced investors. You can choose from nearly 2,000 funds, via dozens of apps, and start with an investment amount as low as Rs 100. Not just that, you can easily spread your investments across markets, sectors, or any type of company. A right mutual fund ticks most of the boxes, namely liquidity, diversification, and returns.
Equity funds the best bet?
Through a mutual fund, you can invest in real estate, gold, equity, and debt. But should you spread your investments equally or focus on only one asset class?
The history of investing clearly suggests that focusing on equity (stocks) provides the best returns, especially for young investors. While debt provides safety and gold offers protection from inflation, equity fetches you the most money in the long run. Yes, this holds true even at a time when markets have fallen and gold funds have done well.
As any experienced investor will agree, highs and lows are unavoidable and changing investments on recent returns are best avoided. If you can spare some cash, bear the risk, and stay patient, you will be able to reap good returns from the equity in the current situation. Here is why:
- The stocks of India’s biggest companies like HDFC, TCS, and L&T have seen a drop in prices since January. The impact of COVID-19 is not long-term, hence their stock prices will recover. And when that happens, those who bought them now will stand to gain.
- Because both banks and investors are looking to lend or invest in good companies, good investments today will only get better tomorrow.
- And as the graph below tells you, Sensex (stock market) is currently at the same position as December 2017. As the economy begins to unlock further, the Sensex will only rise and the economy will slowly return to normal. In a few months, investors should be able to see the growth that earlier took more than two years.
Why can’t I get risk-free returns through a Fixed Deposit?
Because there is no such thing as risk-free returns. As for fixed deposits, many folks invest in it because it is the simplest and safest way to get a steady income or interest. The only problem is that it barely grows wealth, especially after considering tax and inflation. Given how fixed deposit rates have fallen since the lockdown began, it is clear that banks aren’t keen to accept your money. Across the world, banks are now discouraging deposits and making it cheaper to borrow.
If you choose to put all your money in fixed deposits, you will have to settle for a much lower return or invest a far bigger amount. Besides, in the long run, the taxman will be kinder to the mutual fund investor than the FD investor.
Asset allocation is all you need
Just as there is no single food containing all that your body needs, there is no single smart investment option that checks all boxes. You need enough returns from equity (stocks), the diversification of mutual funds, and the safety of products like fixed deposits for short-term needs.
In order of importance, here is what your investments should offer:
- Liquidity: Ability to withdraw money when you need.
- Diversification: Spreading your money across different products
- Controlled risk and volatility: Knowing when and how much of your investment will be available for your life goals
- Returns: Interest rate better than inflation, which is usually around 5%
The pandemic isn’t going away anytime soon; some of its impact — like more people working from home — may never go away at all. Despite this, the Indian economy will grow in the long run. The stock market and investments will broadly follow this growth story. It is time to understand the risk, adapt to smart investment tips, and build your wealth.
Views expressed are strictly author’s own
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