There are many articles and videos on the ongoing crisis, and here is my view on the crisis. While I write this article and make a video of it, there are over 7,50,000 people who have been affected due to this virus and 36,000 have died. This is alarming number and with most parts of the world shut down, it is clear that we are living a scene from any Hollywood disaster movie.
Mutual Fund Sahi Hai and Let’s invest more
It is not surprising to see Mutual Fund AMCs and brokerages urging people to invest more and more. They say this is the time you should invest more, if possible, and that continue the SIPs (systematic Investment Plans). Most of them, accordingly to me, are 50% right. While there is nothing right or wrong, since we don’t know how the future will span out, there are few factors we need to take into consideration before putting more or continuing SIP or withdrawing SIP
SIPs – and investment
Financial planning is not done holistically, is akin to doing only arms in the gym and getting a great bicep with a bent shoulder. For many investment has been “I have ₹ 1000, where should I invest?”. And the answer has been “Put in Mutual Fund, and the best way is SIP”
The answer may be right, based on the right risk profiling of the investor, however, for SIPs the amount is very important, and the amount of investment is determined as the amount the investor is ready to keep contributing for a certain period of time. Therefore, no matter what (apart from emergencies), the amount invested in SIPs should not be withdrawn.
Many retail investors during such chaos withdraw all their mutual fund investment. This should not be done unless the amount is needed as a result of job loss, or urgent medical emergencies (due to lack of proper insurance).
For those who are getting a temporary salary cut, or a reduction of bonus should ideally not think of withdrawal from SIPs. For those who have connected with good SEBI RIAs or good forums would have learned by now, that the amount of investment in SIPs depends on several factors, and not just a random number; and that the amount assumes future fluctuations in decrease of certain pay components, as well as increase in case of pay rise and bonuses.
Therefore, for those who have not determined the SIP amounts, please connect with an SEBI RIA to get the amount first and your goals and profile based on which funds can be recommended.
Recession and COVID19
It is now an academic discussion that COVID19 has caused an economic recession – that statement may not be entirely true. Most parts of the world were already moving towards a recession and COVID only accelerated the process. Even before COVID19, China and India were growing slower than expected in terms of GDP growth. US had the yield curve inversion in August 2019 that sent shock waves across Dow Jones. Everyone knew that economic activity was slowing down, and that a recession was imminent. What we did not know is that the COVID would stop economic activity entirely!
Even if many countries do not declare recession, let us face it – we are in a recession. So, in a recession it is good to have SIPs running. You get the advantage of cost averaging. ie you get more units of the fund for the same amount, and hence in future during a boom run you reap the benefits.
However, there is something that I want to warn everyone here. This is not an ordinary recession. This is a unique one. Countries are locked down – Industries are closed. Automobile industries are shut – ancillaries are shut – vast majority of people in other factories are not working. While the government will provide food and shelter to many workers, this does not save the economy from taking a severe hit.
The next two months will decide the impact of COVID19 lockdown. Hence, keep your money safe, or have about 25% of your additional equity investments triggered. For the rest we can wait until Mid April. You will not miss of out any bottom.
Additionally, unless you know what you are doing in the equity market do not put any amount of money that you think may be needed in case of emergencies. Typically, the extra equity investment should be done only when you hear good news or bad news being stopped (ie lesser people dying across the world).
X Stock has fallen 50% , so let’s put more
This activity is more dangerous than jumping from an aircraft without a parachute. While there is panic selling, do not buy any stock just because it has fallen 50%. Understand the business the company is in and then put money. Also, remember that Mutual funds (whatever scheme) will be always heavy invested in the Bluechips – so you are already invested in the good companies via mutual funds.
So, in case you have good analysis done, then you can go ahead and buy a few stocks of good blue chip companies – HDFC, LnT, SBI – these are companies that will be last to die and if they are gone to 0, then we should have other things to worry about.
A strong suggestion is not to buy mid caps or small caps, just because of the price value you see. Usually, post recession, a new set of companies drive up the market, and the companies that led the previous rally lag. Example – cement stocks of the 90s, real estate stocks of the 2000s. Now we don’tknow which ones may lag – it could be auto, it could be even IT stocks. Again the best way to remain in the market, for a retail investor, is to be in “Emerging Fund” schemes.
When will all this end – Can technical charts help?
When will all this end? Let’s take the 2009 collapse of the Western banks and financial institutions. During the 2009/10 gloomy days, everyone though that the world has come to an end. And the bull run proved once again that a bear is followed by a bull.
Taking a look at the 2009 collapse on a monthly scale, you can see that the initial month was a great fall, then the markets started aborbsing the news of the collapse of the economy, and then it started moving up. It was about 18 months before a real uptrend started.
With COVID19, we know that we would have been in a textbook recession if COVID had not happened, but now with industries locked up, when will be the economy recover? Could take months – the reason is that starting a manufacturing unit is not as simple as turning on the mobile phone. Labourers who have now migrated back to their villages will take lot more time to back to cities and industrial centers. While most governments are supporting businesses by providing soft loans and concessions, spending is going to be halted as consumers stop discretionary spending. We can expect next 4 months of uncertainty before we know that we are in a rangebound recovery and then start putting more money into equity if needed.