The 2021-2022 financial year will be difficult for investors. The second wave of Covid-19 hit India towards the end of the 2020-2021 fiscal year. With the new curfew rules, the economy is once again taking a hit. Investors are worried about another blockage and are wondering about the consequences of another stock market crash. Many are wondering about the right amount of cash to hold on to right now.

In this blog, we present our opinions on what investors can do and how they can manage their money during this exercise:

START A SIP IN EQUITY-RELATED SAVINGS SYSTEMS

We have always advocated investment through systematic investment plans. SIPs offer investors the huge advantage of an average cost in dollars. Investing through SIP eliminates the effect of market cycles on the portfolio over the long term. We have sufficient empirical evidence indicating the benefits of investing through SIP. If you are an individual employee, it is preferable to invest in savings plans linked to shares. ELSS systems offer tax savings of up to Rs 1.50,000. Investing through a SIP in an ELSS system will provide both good returns and lower tax liability.

TAKE ADVANTAGE OF LOWER LOAN RATES

At Tarrakki, we believe lending rates will not drop further from the current level. In fact, there is a greater possibility of rising lending rates. Inflation is expected to rise, providing an ideal environment for borrowing. If you are considering taking out a loan, now is the right time. Higher inflation in the future will prove beneficial to those who borrow today. It’s time to compare the loan rates offered by different banks and choose the lowest loan rate. If you are already paying a bank down payments at a high interest rate, you can refinance the loan and save the difference.

INVESTING BASED ON OBJECTIVES

Talk to your investment advisor, share your goals with them and invest accordingly. Investing in markets is as much about returns as time horizon, liquidity needs, risk appetite and risk expectations. The timing of investment and withdrawal is very important. If you’ve never invested through SIPs before and find the markets to be undervalued or at a bottom, you may also want to consider investing in a lump sum. Smart lump sum investing is always useful, especially if you know how to synchronize the markets well. As this is difficult to do, we suggest you invest through SIPs. An investment advisor can analyze your individual case and give you the right recommendations.

TO DIVERSIFY

Diversification can be seen as a recognition that sometimes we can go wrong. Markets are expected to remain volatile, as there is no end to the pandemic in sight. In such cases, a well-diversified portfolio is extremely essential. Now is not the right time to enter specific sectors or specific asset classes. Markets are volatile and can make you pay heavily for choosing a concentrated portfolio. If you are a mutual fund investor, diversification is a must, both at the asset level and at the constituent level. Care should be taken not to over-diversify, as this can increase costs. Consult a good advisor who will help you choose the right mixture for you. Consider venturing into other investment streams as well.

TAX PLANNING

Besides investing in ELSS funds, there are several other avenues available, such as EPF (Employee Provident Fund), PPF (Public Provident Fund) and National Savings Certificate (NSC); all of these avenues offer tax advantages. These avenues are preferable for investors who want stable and guaranteed returns. Empirically, ELSS has provided higher returns than the others mentioned above. The other instruments also have longer blocking periods. If you are selling residential property or land, huge capital gains taxes can be avoided simply by purchasing capital appreciation bonds issued by government entities.

KEEP LIQUID ASSETS ON HAND

This year, we realized the importance of having cash and emergency funds. We strongly recommend setting up an emergency fund for any eventuality that may arise. You can invest any amount of money you want in liquid securities each month. In order to achieve better returns, we recommend that you invest in liquid funds or money market funds instead of keeping cash in your savings account.

NEVER PURCHASE INSURANCE AS AN INVESTMENT

Insurance is a risk transfer product, not an investment. Many insurance products that look like investments may not be financially profitable because of their comparatively lower returns. It is therefore imperative that your objectives are clear. If one wants a risk transfer for a specific probable disaster, opting for insurance makes sense. But insurance should not be viewed as an investment option with good returns, as better avenues with significantly higher returns are available.

AVOID HIDDEN COSTS

When you invest in regular mutual funds, the expense ratio will be high because it includes the brokerage paid by the fund house to your broker. For this reason, we insist on investing in direct mutual fund plans. The difference in returns will result in significantly more wealth creation compared to regular mutual funds. If you are buying gold in the form of jewelry there are huge hidden costs like GST and fees. Thus, for the sole purpose of investing, one can opt for ETFs with lower hidden costs.

When it comes to investing, you can always use external circumstances to your advantage. All we need is to predict how things might turn out in a year. Very few people have this foresight; this is where a financial advisor can help. In conclusion, we would like to reiterate that diversification is extremely important and that venturing into various avenues of investment such as the commodity market can be very beneficial. Take the time to analyze your own risk appetite, life goals, and financial goals before seeking a financial advisor to help you.

The writer, Saumya Shah, is the founder of Tarrakki, a new era comprehensive wealth management app. The opinions expressed are personal and do not represent the views of Tarrakki.