It is essential to align your investments with your appetite for risk, your financial objectives and the corresponding expectations of profitability. However, when there is an unprecedented economic situation, such as the one we currently find ourselves in, more effort than normal is required. The International Monetary Fund has placed the economic consequences of the current Covid-19 crisis in the category of a severe recession, worse than the 2008 high-risk crisis. Commodity prices have fallen globally. Crude oil prices became so volatile that at one point they were trading negative. Stock markets have also witnessed extreme volatility across the globe, and debt investments have also caused 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 movements, but without panicking. I’ve outlined some pragmatic investment tips that are likely to work in your favor if you’re looking to invest during such volatile market conditions.
1. Diversification should not be ignored
Diversification protects the investment portfolio against the adverse impact of market volatility. If your investment portfolio is adequately diversified, you can outweigh losses to some extent due to one of its underperforming asset classes through better returns from another asset class. For example, in the current scenario, if you invest in gold, FD, and stocks, your equity investments may yield negative returns due to market volatility, but gold and FD returns may help limit the overall loss. Likewise, in today’s market, anyone who has diversified their investment portfolio to include gold, FD, or small savings schemes along with stocks, their portfolio will be better off than those investors who would have invested only in stocks. That said, it is important to avoid over-diversification and select asset classes based on your financial goals, risk tolerance, and liquidity requirements.
2. Focus on investing in installments and keeping it long-term
When you invest in high-risk instruments like stocks, you should focus on keeping it long-term. Also, instead of a lump sum investment, investing through installments like Mutual Fund Systematic Investment Plans (SIP) can help you reap the benefit of averaging the cost of the rupee while reducing your investment risk at the same time. . When you continually invest with a long-term vision, you begin to see the collapse of the market as an opportunity to make a value investment. The market generally revives in the long term, and could be a recovery in a “V” or “U” shape, but in both cases, long-term investors are likely to make more money compared to investors holding a short term . term view
3. Take steps to secure your financial goal
Your investments must be strictly in sync with your financial goals. If you are pursuing short-term goals, you can focus on relatively safe investments like bank funds or liquid mutual funds, while for your long-term goals, you can invest in stocks for high-yield requirements and small savings or gold schemes for low to low. average return requirements. However, it is important to ensure your objective if your investment achieves the target corpus before completing tenure. For example, suppose you need a corpus of Rs. 20 lakh for buying a house after 10 years; For this, it began investing in a capital SIP with a return expectation of 12% per year. But after six years, you got closer to your goal in such a way that even if you withdraw the capital SIP and put that money in a FD bank for the rest of the tenure, you will still get the desired corpus. In such a case, we strongly recommend that you secure your objective by redeeming risky investments and placing your funds on a more secure instrument to ensure that you achieve your objective on time.
4. Do not leverage to invest money
Living with high debt and investing money in high-risk instruments at the same time can backfire when the market becomes extremely volatile, as in the current situation. The Covid-19 crisis has led countless people to lose their sources of income, making debt payments extremely challenging. In addition to that, the value of various investment classes has turned negative. In this situation, there is a chance that people living with high debt will be forced to pay off their investment with big losses to make sure they can pay their EMI on time. The point is that you always take into account your debt situation when evaluating your tolerance for investment risk, that is, your real ability to assume the investment risk that is determined by your income, debt situation, insurance coverage, etc. Their risk tolerance may be different from the generic consideration of their risk appetite, that is, their willingness to take investment risks, which is mainly determined by factors such as their age and experience.
It is important to stay well informed when faced with an unprecedented situation to avoid financial panic decisions and unnecessary losses. If you are unsure about creating a pragmatic investment plan, feel free to consult your investment advisor to formulate ways to minimize losses and help establish a path to rapid recovery of your investment portfolio whenever markets revive.
(The author is CEO, BankBazaar.com)