The year 2020-21 has been one of the most unprecedented times that we have seen. A lot of people are facing uncertainty on multiple fronts like their health, job, career, savings, investments, etc. In this article, we will discuss some investment tips that can help you navigate these uncertain times for a prosperous future.
1. Contingency fund
A contingency fund can help you tide over unplanned and unexpected contingencies. Some of these include:
a) Loss of job
b) Delay in getting a salary for few months
c) A temporary cut in salary
d) Hospitalisation of any family member
e) Any other contingency
A contingency fund should be equivalent to 3-6 months of your regular monthly expenses. If you don’t have a contingency fund, you can make one by starting a systematic investment plan (SIP) in a liquid mutual fund. If you already have a contingency fund, you should evaluate the amount that you have in it.
Investing the contingency fund money in a liquid mutual fund has advantages like capital protection, ease of access, liquidity, and quick transfer of money to your savings bank account. Some liquid mutual funds provide an instant redemption option wherein you can transfer a specified amount in your bank account instantly.
Actionable tip: Build and maintain a contingency fund with 3-6 months of expenses in a liquid mutual fund. It can help you tide over any urgent cash requirements during uncertain times.
2. Invest first and then spend
When it comes to using our income for expenses and investments, most of us follow the equation:
Income – Expenses = Savings and Investments
While following this equation, most of us realise that by the time we reach the end of the month, after meeting our expenses, there is hardly any money left for our savings and investments. Due to this, your financial goals suffer. This is specifically for people who are not disciplined savers and investors.
Hence, we should flip the equation and instead follow this:
Income – Savings and Investments = Expenses
We should make sure that we first save and invest towards our financial goals, and then spend the remaining money towards our regular expenses.
Actionable tip: If your salary gets credited on the 1st of every month, you should give the auto-debit mandate for your mutual fund SIPs, and insurance premiums for the 3rd or 4th of the month. This will make sure your investments are taken care of. You can then spend the remaining income on monthly expenses.
3. Continue SIPs
In 1990, the BSE Sensex crossed 1000 for the first time. In 2020, the Sensex hit 50,000. So, in 30 years, Sensex multiplied investor wealth by a whopping 50 times. But this 30 year Sensex journey from 1000 to 50,000 had many challenges on the way. Some of these challenges include:
a) 1997 – Asian Currency Crisis
b) 1999 – Kargil War
c) 2000 – Dot com bubble burst
d) 2001 – World Trade Centre attack
e) 2008 – Sub-prime crisis
f) 2012 – European debt crisis
g) 2016 – Demonetisation
h) 2020 – Covid-19
(Source: https://twitter.com/BSEIndia/status/1352100012281405441)
Each of these events led to a major sell-off in the stock markets. Yet, the markets absorbed all the shocks and bounced back. After every fall, the market recovered and went on to make new highs.
During all the above uncertain times, investors who held their nerves and continued with the mutual fund SIPs got rewarded handsomely.
Actionable tip: Continue with your mutual fund SIPs even during adversaries. With every market fall, your SIPs will benefit from Rupee Cost Averaging (RCA) which will lower your acquisition cost. Rather than getting scared of market volatility, make it your friend and benefit from it. In the long run, the market bounces back after uncertain times and makes new highs as it has always done in the past. Kick-start your monthly SIP journey with Niyo Money.
4. Asset allocation
Asset allocation should be at the core of every individual’s investment portfolio. Asset allocation is the way of diversifying your investments across various asset classes such as:
a) Equity mutual funds
b) Debt products
c) Gold
d) Real estate
e) Cash etc.
Asset allocation will depend on various factors like an individual’s risk profile, age, investment time horizon etc. With proper asset allocation in place, your investment portfolio can benefit from the negative correlation between different asset classes. For example, in the first half of 2020, the stock markets went down but gold gave one of the best returns in almost a decade.
Actionable tip: Based on your risk profile, have an appropriate mix of different asset classes like equity mutual funds, debt products, and gold in your portfolio. Equity mutual funds have the potential to give inflation-beating returns during good times. Debt products will lend stability to your portfolio when equities are down. Gold will provide a hedge against inflation and support the portfolio during uncertain times.
5. Focus on your financial goals
Rather than getting worried about market falls during uncertain times, focus on your financial goals. Map all your investments to your financial goals. Once you do that, you will be able to set aside your emotions of greed and fear and continue investing regularly till your financial goals are achieved.
Without goal-based investing, people try to just maximise their returns from your investments. This is where market timing comes into the picture and emotions of greed and fear take over. When markets are at highs, people become greedy and hold on to their positions hoping that the market will go even higher. Eventually, the market falls, people become fearful, and they do panic selling and book losses. Market timing is futile and doesn’t work.
Actionable tip: Focus on spending time in the market rather than focusing on market timing. Spending time in the market and continuing your SIPs by keeping your emotions aside will help you sail through uncertain times. With Niyo Money, you can also do goal based investing that helps you focus and achieve goals in a more strategic way.
6. Regular review and rebalancing of the investment portfolio
You should have a financial plan for all your important goals like a child’s higher education and marriage, own retirement, etc. Once you have made a financial plan and implemented it, you should do a regular review. Take the professional help of a qualified and experienced financial advisor, if required.
You should review the progress of your financial plan once in 6 months or so. As your age progresses and the time left to achieve the financial goal progresses, you should review the asset allocation and rebalance it. Based on the rebalancing of your asset allocation, you should make appropriate adjustments to your investment portfolio.
Actionable tip: Continue investing even during uncertain times. Do a regular review of your financial plan and rebalance your portfolio, whenever required.
We have discussed the above six actionable tips that can help you sail through uncertain times. Do remember the famous saying: “Tough times never last, but tough people do!”. So be mentally tough, and this too shall pass!
To plan and accomplish your financial goals, you can invest with Niyo Money. We facilitate investments in direct plans of mutual funds. Our data-driven unbiased mutual fund selection strategy gives up to 3-4% higher returns than an average mutual fund selection. Our services are completely free for investors.