It’s critical to align your investments to your risk appetite, financial goals, and corresponding returns expectations. However, when there is an unprecedented economic situation, like the one we currently find ourselves in, it requires more effort than normal. The International Monetary Fund has put the economic fallout of the current Covid-19 crisis in the category of a severe recession, worse than the 2008 subprime crisis. The prices of commodities have fallen globally. Crude oil prices became so volatile that at one point it was trading in negative. The equity markets have also witnessed extreme volatility across the world and debt investments have also triggered some panic among investors due to their underlying credit risks.
With so much volatility in the market, what should an investor do and where should he invest his hard-earned money? This unprecedented situation demands unprecedented moves, but without getting panicky. I’ve outlined a few pragmatic investment tips that are likely to work in your favour if you’re looking to invest during such volatile market conditions.
1. Diversification must not be ignored
Diversification allows protection to the investment portfolio against the adverse impact of market volatility. If your investment portfolio is adequately diversified, you can overcome the losses to some extent due to one of your underperforming asset classes through the better returns generated by another asset class. For example, in the current scenario, if you invest in gold, FD, and equities, your equity investments may fetch negative returns due to market volatility, but gold and FD returns can help in limiting the overall loss. Similarly, in the current market, whosoever has diversified his investment portfolio to include gold, FDs, or small saving schemes along with equities, his portfolio will be doing better than those investors who would have invested only in equities. That being said, it is important to avoid over-diversification and select the asset classes as per your financial goals, risk tolerance, and liquidity requirements.
2. Focus on investing in instalments and holding it for the long-term
When you invest in high-risk instruments like equities, you should focus on holding it for the long-term. Also, instead of a lump-sum investment, investing through instalments like the mutual fund Systematic Investment Plans (SIP) can help you to get the benefit of rupee-cost-averaging and reduce your investment risk at the same time. When you invest continuously with a long-term view, you start seeing the market crash as an opportunity to make value investment. The market usually revives in the long-term, and it could either be a “V” or “U” shaped recovery, but in both cases, long-term investors are likely to make more money in comparison to investors who keep a short-term view.
3. Take steps to secure your financial goal
Your investments should be strictly in sync with your financial goals. If you are chasing short-term goals, you may focus on relatively secure investments like bank FDs or liquid mutual funds, whereas for your long-term goals, you may invest in equities for high return requirements, and small saving schemes or gold for low to medium return requirements. However, it is important to secure your goal if your investment achieves the target corpus before completing the tenure. For example, suppose you need a corpus of Rs. 20 lakh for buying a home after 10 years; for this, you started investing in an equity SIP with a return expectation of 12% p.a. But after six years, you reached closer to your goal in such a way that even if you withdraw the equity SIP and put that money in a bank FD for the remaining tenure, you’ll still get the desired corpus. In such a case, you’ll be well-advised to secure your goal by redeeming risky investments and putting your funds in a safer instrument to ensure you achieve your goal on time.
4. Don’t leverage to invest money
Living on high debt and investing money in high-risk instruments at the same time can prove to be counterproductive when the market becomes extremely volatile, like in the current situation. The Covid-19 crisis has led to countless people losing their income streams which has made debt repayments extremely challenging. On top of that, the value of several investment classes has gone negative. In this situation, there are chances that people who are living on high debt may be forced to liquidate their investment at heavy losses to ensure they are able to repay their EMIs on time. The point being, always factor in your debt situation while evaluating your investment risk tolerance, i.e. your actual ability to take investment risk which is determined by your income, debt situation, insurance cover, etc. Your risk tolerance can be different from the generic consideration of your risk appetite, i.e. your willingness to take investment risk, which is mostly determined by things like your age and expertise.
It is important to stay well informed when you are facing an unprecedented situation to avoid panic-stricken financial decisions and unnecessary losses. If you’re unsure about building a pragmatic investment plan, don’t hesitate to consult your investment advisor to formulate ways to minimise losses and help lay down a path to quick recovery of your investment portfolio whenever the markets revive.