Invest, hold or redeem – what investment strategy to follow during Covid time?
By Palka Chopra, Senior Vice President, Master Capital Services
The global pandemic is changing the world. Perhaps the biggest such event since the great depression, novel coronavirus has taken a hard hit on the global economy with uncertainty lingering on the stability of stock market values and businesses across various sectors. There is volatility well beyond normal levels – from huge fluctuation in markets to no clarity as to when life will be back to normal.
Amid the chaotic environment across the globe coupled with the prolonged economic slowdown, panic and unpredictability are at their peak. As investors are worried about the future of their investments, let us read through some important tips that equity investors need to know to ride out the stock market volatility.
Should you invest?
It is not the first time that financial markets are undergoing such turbulent times. There has been a pandemic situation and market fluctuation before as well, but markets have emerged stronger, sooner or later. It is advisable to stay invested in such a situation to benefit from it.
Also, this is a good time to increase your investments if your asset allocation plan allows it. Adding to your Equity portfolio at a lower cost would bring down your overall costs which would set your investments for success once the situation returns to normalcy. While a market crash has a different reason every time, the methods of surviving these events remain the same. Here are some tips for investors:
1. Redeem if you’ve made profit but continue your SIPs
Redemption is to be done only when you are making good profits or when you need the money. But your SIPs should continue. Unlike the popular misconception of redemption, market crash is the best time to invest as you end up buying more shares when prices are low against fewer shares when prices are high. Investors who are bold enough to continue investing in stocks during the dark days always see growth in the long run. The memories of swine flu and zika virus outbreak are still fresh. Recovery happened then as well. It is important to keep calm and not redeem your investments under pressure.
2. Portfolio Rebalancing
Portfolio rebalancing is an important task to ensure that your investment portfolio is in sync with your long term goals. When a balanced investment portfolio is created, the performance of various investments are considered as on the date of investing and assess their potential returns.
However, as time goes by, some instruments can under/over perform as per the market conditions, like the current Covid19 situation. Therefore your portfolio needs to have a good diversification. Also your risk tolerance and financial goals can change with time. Hence, it is necessary to revisit your portfolio and ensure that it is in sync with the market and your goals.
3. Want to Invest More?
Adding to your portfolio during market crunch i.e. when costs are low brings down your overall cost and scope is huge that this will give good returns once the market resumes stability. Some of the safe investment options are:
Blue Chip Stocks: This is a good time to invest in blue-chip stocks as they are not affected much by the market movements. These stocks have strong and stable return ratios and offer stability when the market seems volatile.
Debt Funds: These funds invest in fixed income securities with investment options ranging from Liquid Funds and Gilt Funds to Short Term Plans (STPs) and Monthly Income Plans (MIPs).
Index Funds: These funds track a popular stock market index such as the Sensex and Nifty 50. It replicates the investments within companies included in the main indices with the same weights.
Mutual Funds: Mutual funds (MFs) offer investors a great way to diversify and gives the benefit of rupee cost averaging.
4. Give Importance to Liquidity
If you are running low on liquidity in your overall portfolio, it is advisable to redeem some funds and create the required liquidity. However, if you have sufficient cash to tide over these unsettling times, consider fresh allocation.
5. Don’t follow the herd mentality
It’s perfectly fine to be inactive. What is more important is to not buy or sell just because someone else is doing it. Your existing portfolio is already doing the job of making sure you invest in the times of market crunch at a lower overall cost.
The novel coronavirus has gut-punched the global market, but we will get through this. Do not panic and do not redeem your investments if you are doing it just out of the fear of coronavirus. Also, don’t go overboard with investing. Investors shall look at equities and allocate capital that is not required for at least another 3 years.