Handling savings in post-coronavirus era

The recent coronavirus outbreak across the globe has led to high market volatility, with sharp movements being seen on both sides. Amidst the flight of FII investments, India VIX touched its all-time highs recently. The sharp corrections on account of COVID-19 disruptions led to a 23% fall in NSE Nifty50 during March 2020 and an overall 26% fall over the last one year.

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However, amidst all the market chaos and volatility, the investors must ignore the daily price movements and focus on their long term goals. While pressing for redemptions to prevent further loss will convert the notional losses presently into real losses, staying invested will enable them to participate in the market rallies as and when the markets recover.

Until now, most conversations on investments revolved around equity investing while other asset classes generally took a backseat. Staying concentrated into equities may have dealt a severe blow to most portfolios. It is always advised to diversify across asset classes and not put all your eggs in the same basket. This is important as different asset classes tend to react differently to the same macroeconomic event.

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While equity markets have been hammered during the past month resulting in high negative returns for the investors during fiscal 2020, debt (represented by CRISIL 10-year Gilt Index) generated 14.55% returns during the same period. Similarly, gold has also given spectacular returns of 38.55% during this period.

Therefore, investors need to review their portfolio and rebalance for the desired asset allocation strategy. The current events due to COVID-19 give us a good opportunity to do a course correction in our portfolio, if needed. However, recency bias often tends to impact the investment behaviour of investors significantly.

While the inherent optimistic investor may like to stay positive on the long term growth outlook, the recent negative performance of the investments tends to cloud such optimism, and the investor might prefer to allocate a higher proportion to the investments that have performed well recently.

As such, debt and gold may take a significant proportion of the incremental investments under the current circumstances. However, one must not go too conservative on the equities side and overweight on debt, especially for their long term financial goals.

Even within the equity allocation, it would be prudent to invest into the companies with fundamentally strong balance sheets, who are likely to withstand this storm in a better manner and can also be expected to lead the market recovery, as and when the situation normalises.

However, instead of choosing select companies, it might be a better option to place a bet on the overall basket of market leaders and strong performers which form the part of the benchmark indices.

As such, the investor can consider investing in index funds and index ETFs, like Nifty BEES. Further, the lower expense ratios for index funds and ETFs make the overall returns more favourable to the investors as compared to active investment funds in the absence of an alpha.

Additionally, the economic disruptions due to lockdown are also expected to impact the cash flows for several individuals, who are expected to suffer from temporary disruptions of income due to delayed salary payments, low salary hikes, delayed bonuses, etc. At the same time, regular and recurring expenses will continue.

As such, the current times of uncertainty have also brought the spotlight on the importance of an emergency fund corpus. It is generally advised that one must maintain an emergency corpus of at least six months expenses for the rainy times.

If you have not maintained an emergency fund till now, make sure you steadily create an emergency fund once the situation is back to normal.The current Coronavirus crisis may be seen as a reset button for your investment strategy
wherein you review it religiously and get back to the fundamental investing principles in the
pursuit of your financial goals. Stay safe and happy investing!

(The writer is ED and CEO, Nippon India Mutual Fund)