Investors have seen long accumulated profit getting wiped away within the blink of an eye. However, as people begin rebuilding their lost asset, they scout for various options. This is the right time to invest in stocks of good companies, which are now trading at dirt cheap prices. Even investing in Systematic Investment Plans (SIP) is a good option. And gold is always a safe haven when equity market is volatile.
However, every investment should be done for a longer period to yield better returns, even though the results of recovery could be visible only from the second half of the current fiscal 2020-21 (FY21).
The government has rolled out an economic package worth `20 lakh crore to provide necessary shots to various sectors. To revive economic activities through its Atmanirbhar Bharat Package the government has put much stress on the MSME, even by revising the definition of the sector.
The government’s self-reliant package has focused on liquidity, land, labour and laws.
Needless to say, it took lot of liquidity measures like `3 lakh crore collateral free automatic loans for businesses, including MSMEs, `30,000 crore liquidity facility for non-banking finance companies/ housing finance companies/microfinance institutions and `45,000 crore Partial Credit Guarantee Scheme 2.0 for NBFC that would benefit a lot of stocks directly and indirectly. “The first quarter of FY21 appears to be extremely challenging. I don’t see the impact of lockdown abating until we have more relaxations and the virus situation is under control. For the full year, India may just eke out miniscule growth, led by a possible recovery in H2. We see growth to be under the two per cent mark, based on return to normalcy in the second quarter and subject to a transition towards reopening, by end of Q1FY21,” says Rahul Jain, Head, Edelweiss Personal Wealth Advisory.
The pandemic-led lockdown has led to equity markets taking a severe hit. Traditional investors who typically invest in fixed income instruments such as bank deposits, bonds and debentures, have remained unscathed. The recent correction however, has once again highlighted, that investment rules like asset allocation and diversification, should be followed at all times.
Even government has drastically slashed interest rates for small savings scheme for the first quarter of 2020-21, which means popular small savings schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) and Kisan Vikas Patra (KVP) would yield lesser return now.
The PPF interest rate was slashed by 80 basis points and will now give 7.1 per cent return, while NSC will give 6.8 per cent and KVP will give now 6.9 per cent returns. Thus the average earnings of a person from various investments has already come down drastically.
“There is no doubt that equity investors followed by mutual fund investors with exposure to equity mutual funds would have faced massive losses. But one should keep in mind that if the investor has a long-term horizon of around five to 10 years, the Indian economy will definitely bounce back and the investor should instead utilise the opportunity to balance out the asset allocation which includes equity, debt and gold,” says Vijay Kuppa, Co-Founder, Orowealth.
In terms of returns, exposure to equity would have led to around 25 per cent decline compared to mutual funds wherein the losses would be around 15 per cent. Traditional instruments like fixed deposits would always prove safest, offering around 5.5 to 6 per cent returns. However, one must maintain that inflation has a significant impact and therefore equity as an asset class can beat inflation over a period of seven to 10 years.
He adds that Indian economy will be facing massive headwinds in terms of job losses, decline in manufacturing activity followed by impact on GST collections, migrant labour issue, which may lead to shortage of labour in core industries like construction and automobiles. India may take around six to nine months as the lockdown is relaxed followed by gradual recovery in economic activity in terms of manufacturing and rise in consumption.
Raj Khosla, Founder and MD, MyMoneyMantra.com says the impact of the lockdown and the widespread job losses will continue to haunt the economy for several quarters if not years. Even before COVID-19, the economy was facing a structural slowdown. Now that demand and production have fallen off the cliff, the coming quarters are likely to see a protracted slowdown.
The recent pull-back of six debt funds by Franklin Templeton has investors shying away from the debt market. “Real estate has been a stressed sector for a while now making it unattractive as well. This leaves equity as a viable investment for investors to gain, considering its sharp fall and irresistible prices,” feels Tarun Birani, CEO, TBNG Capital Advisors.
Then which are the investment tools one should look at to multiply money?
”Any asset, which is under-performing long-term average, should be preferred as it offers better returns compared to current favoured assets that are already at high levels. Interestingly equity has underperformed fixed income from last three to five years, which gives me confidence that equity offers best return potential among all assets, provided it fits in suitability and risk reward assessment of the investor,” he says.
“Unfortunately, it is rare that investors are able to get the timing right to take advantage of the windfall, which makes a lump sum investment an attractive deal. Since times are uncertain and none of us can confidently predict the bottom of this fall, the best strategy right now is to stagger your investments in an incremental manner over a certain period. Keep your risk appetite in check and invest with a long term view to gains,” he adds.
Jain says, investors should review their investment portfolio in consultation with their wealth advisor or a financial expert. Portfolios must be restructured to align with optimal asset allocation based on age, risk profile, investment horizon and expected returns. Fundamentally sound stocks and mutual funds, although temporarily underperforming, should be held on to. Laggards and underperformers should be replaced with stocks that can be potential outperformers, in the future. Most importantly, lessons should be learnt from past mistakes and the investment rules of asset allocation should be stringently adhered to.
It is known, that equity has the power to create wealth in the long term. Hence building a strong market portfolio of robust stocks, will help reap benefits, despite the current crisis. Investments in well managed, diversified equity funds with proven track records, through the SIP mode, will surely help.
Kuppa suggests investors to continue with their respective SIP as it provides an opportunity to average out the cost of holdings.
But with the Franklin Templeton incident people have lost trust on mutual funds.
Experts say it is not fair to generalise. There are a lot of funds which have stood the test of time and created wealth for investors. Investors, on their part, should do thorough research, prior to investing.
However, Kuppa accepts Franklin Templeton incident has definitely shaken investor confidence, which can be seen in terms of redemption pressure in debt funds of different AMC’s including Franklin. An investor should always watch out for the underlying securities held by the respective schemes, which can range from corporate bonds, government papers and will give a fair idea on the safety aspect. Debt funds with good quality commercial papers would not face major issues in terms of redemptions.
“Also, we would suggest diversifying the portfolios across asset classes – equity, debt and gold, which will assist in hedging the portfolio during the market downturn. Exposure to gold and debt will always help in capital protection during a slowdown or recession. Investments such as Sovereign Gold Bonds, indirect equity exposure via mutual funds, bonds should be considered as dynamic asset allocation and become very important during times of slowdown. An individual should always take a long-term view on investment, which usually should be around seven to 10 years considering the compounding effect of equity over a period of time and this will assist in creation of wealth,” Kuppa adds.
Hence the key to successful investment is patience. Any hasty step can lead to a loss.
Investor confidence will be restored based on how quickly the economy recovers. The government is also taking proactive measures to tackle the situation. It will have to maintain a fine balance in terms of how quickly the lockdown can be lifted and the spread of the disease can be controlled. Easing lockdown may lift the economy for the time being but holds a greater risk of further spread of the virus, which is already on an abysmal rise. The government needs to watch very carefully.
How much time will it take for investors to regain their losses after COVID-19 spread is seen reducing in India?
“Changing business dynamics and alteration to consumer preferences, could cause an upheaval in how different sectors command valuations and contribute to earnings. This would be key for the markets to recoup losses. In the past, markets have taken several quarters and sometimes years, to recoup losses, post a crisis. So, expect a gradual return to normalcy,” says Jain.
Apart from the `20 lakh crore stimulus, what other things can the government do to make the economy roll?
Khosla suggests, “Due to COVID-19, revenue collection has come to a standstill while expenses are shooting up. So a tax cut is out of the question. Even so, some tinkering with the Long-Term Capital Gains Tax (LTCG) could boost investor sentiment. For instance, raising the threshold for tax on LTCG from Rs 1 lakh to `5 lakh will be a welcome move.”
Now that the country is in the fourth phase of lockdown, it is no longer bothered about survival in lockdown, rather it is looking forward to the reopening formula. People have now come to terms with the fact that the world has to co-exist with the virus for the time being and we cannot just lock ourselves up and let our fortunes get washed away due to the fear of a fatal disease. Yes, it is a deadly virus and we have to be cautious of but at the same time we have to start living. We should not hold back our investment decisions.