As we step into 2020, an analysis of 2019 is inevitable – it has been a year of ‘learnings’. From bank failure, NBFC crisis to misappropriation by financial intermediaries, there have been several upheavals in the past year. We look at the big learning from 2019 and how to include them in your 2020 financial health assessment.
Lessons for investors
1/. Understanding and appreciating ‘Risk’ is very important. Risk can be managed but not wished away. Investors should assess the risk associated with a particular investment versus their own risk profile. Asset allocation is a great way to manage the risk of your investments
2/. Small and mid-cap fund investments are not suitable for all type of investors. These investments should be made with specific requirements and are suitable only for those investors who have the necessary knowledge and who can sit through market volatility.
3/. Volatility is an essential feature of the markets and markets work in cycles.
The overarching message this year was that simplicity is underrated. A simple index led portfolio backed with good asset allocation into diversified assets such as gold and patience can do wonders to your wealth. Let us review certain lessons from 2019 to usher in a better and financially strong 2020 –
Debt Mutual Funds
2019 will specifically be remembered for shattering many myths associated with Debt mutual funds. All Mutual Funds in India come with the standard warning “Mutual fund investments are subject to market risk. Please read the offer document carefully before investing”. Very few investors, though, take the pain of understanding the product they choose to invest in. Investors had been investing in various debt mutual fund schemes under the impression that these are better post-tax investment extensions of bank fixed deposits.
However, the last fifteen months have had some harsh and important lessons for such investors. The IL & FS fiasco and subsequent NBFC and HFC crisis had a crippling effect on the entire system. There have been multiple defaults and downgrades, affecting both the investors and debt Fund houses alike. Terms like credit risk & interest rate risk were unknown to investors. In fact, risk in debt Funds in itself was incomprehensible for investors and difficult for advisors to explain.
Equity Mutual Funds
Many investors were lured into small and mid-cap equity mutual funds because of their 1-3 years of continuous high returns. In fact, many first time investors, who ideally should have started with Index Funds or ELSS (Equity Linked Savings Scheme), invested in small and mid-cap funds, in their quest for earning market-beating returns. Investors who had invested just for participating in the party without evaluating their risk profile and without understanding the nature of these investments have been hit hard. Most of these funds have been proved to be extremely volatile and are in the red.
PMC Bank and Karvy Stock Broking crises
The PMC Bank crises came as another setback for investors. It also emphasized that placing all eggs in one basket is not a pragmatic financial decision. Spreading your fixed-income assets is a better option. Diversification should be across and within the fixed income spectrum. For example, a mix of FD, PPF, Gold can be looked at.
Karvy Stockbroking default points to another instance of misutilization of client money without their consent and authorization. This also highlights the danger of not being an ‘educated and aware investor’.
You should keep a track of all your bank and investment accounts, even if you have an advisor. You should periodically monitor all financial transactions through account statements or by logging in to online accounts. Finally, always know what you are getting into, ‘before making a decision to invest’
Market Timing
Far more money has been lost by investors trying to anticipate corrections than lost in corrections themselves.
: Peter Lynch
Market timing, yet again, proved to be a futile exercise for equity investors. Many investors realized this in September 2019 when the corporate tax rate cut was announced. The market, which had been going down rapidly owing to various domestic and international factors, was, in two days, up by a whopping 3000 points. This erased all the losses for the year. Since then, it has mostly stayed positive and has been touching new highs. Thus, investors who had sold out and were looking for a better opportunity to re-enter have now been made to stay out as the better opportunity that they were waiting for, has remained elusive.
Investors should keep in mind that staying invested is the only thing that matters in markets. There can be long periods of ‘no action’ and then there will be instances of ‘market highs’. Chasing returns and trying to stay ahead of the game does not work in markets.
Financial Health assessment – Time to try something new this year
Setting new targets is not bad. However, adopting a different approach can change the way you conduct your financial affairs in 2020. As we make a new beginning, pick a pen and a notepad (an app or excel or whatever works best for you) and conduct this exercise for all your investments:
Check the asset allocation mix
How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.
:Robert G. Allen
Too much in real estate and too little in gold, debt and equity? Time to change and rebalance the asset allocation mix. As we have learnt last year, high exposure to a particular asset class is dangerous. A portfolio should periodically be reviewed to check if it is skewed towards a particular asset class or category. Investments should be made across and within asset classes taking into consideration, among other factors, the maturity period, style or strategy, sector (which you understand), geographies (domestic or international). Have you experienced any life changes – the asset allocation mix needs to change.
Goal-based investing
Has any of the goals you had set been achieved or is nearing the target date? Start moving money from equity-based investments to fixed income assets or bank deposits. Target-based investing helps measure returns against specific goals- whether a short term like a holiday, purchasing utility products, house or car down payment as well as a long term like child’s education, retirement planning or setting up a business. Your salary or regular income is not your wealth – understanding this vital aspect is of utmost importance. Wealth is what you create with your salary or regular income, through goal-based investments. Our goal planner will not only help you plan and track your goal but also guide you with the ideal asset allocation.
Tax consideration
For most investors, taxation is an aspect which normally comes into play when the annual document submission exercise in offices kicks in. People associate income tax with Section 80 C investments only and see it as a ‘necessary evil’. However, assessing the tax effectiveness of an investment should not be limited to this. The November 2019 CPI inflation number is 5.54%. With RBI cutting interest rates five times in 2019 and with banks reducing rates across the spectrum, the era of high-interest rates on small and fixed instruments is set to be over, slowly but gradually.
Thus your bank Fixed Deposit, post taxes, will not yield any ‘real’ returns. If you do not have a “post-tax returns” mindset, then your actual returns from your investments could possibly be negative. Debt investments will yield slightly better post-tax returns (with indexation benefit).
Equity investments have been and can be the most effective way to gain the best post-tax returns. These come with an additional incentive of Tax harvesting. Even when it comes to section 80 C investment options, ELSS should be your investment vehicle of choice. Read more here ELSS. Before choosing an investment option, taking a consolidated view with respect to post-tax returns will give a better picture. It aids in better decision making as well.
The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and starting on the first one.
: Mark Twain
Start 2020 on a positive note – make resolutions-stick through, be disciplined, be financially healthy and above all, stay invested!
Happy investing in 2020!
Interested in how we think about the markets?
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