While working from home, we all also spending a lot of time thinking and trying to figure out how things around us will shape up once this coronavirus crisis is over.
We are currently witnessing events of unprecedented nature, wherein it is important to stay calm and manage things smartly. The same goes for your finances, especially in a falling market. Even with the current uncertainty in every aspect, experts suggest financial protection is a must under any given circumstance. Having said so, investors should really think it through before doing anything with their investments.
In the wake of this crisis, here are some do’s and don’ts that investors should follow:
Firstly, it is important to stay calm and think wisely about your financial portfolios. Every few years, markets experience sharp corrections and volatility on the downside. Stock prices are always more volatile than the fundamental values of businesses. Market prices overreact on both sides; they are euphoric after a rally and they panic after every sharp fall.
Nimesh Chandan, Head of Investments Equities, Canara Robeco Mutual Fund says, “Taking investment decisions when one is overrun by fear is seldom helpful. This is a time when one makes a mistake of giving too much importance to the short-term news flow rather than long term goals.” He further adds, “Market crashes are raw material, or opportunity that an investor can use for successful investing. Patience is the critical difference between an investor and a speculator.” Hence, investors at such time will have to have patience and a long-term investment horizon to realize the benefits of investing during these times.
Note that, downturns in the stock market are not a time to cut investments but to cut expenses and possibly start one more SIP (systematic investment planning). SIPs take advantage of market volatility. Experts say, stopping SIPs during these times will mean one turns the primary advantage of this systematic investment into a disadvantage. Ideally, an investor should buy into the pessimism, hold investments over the cycle and withdraw during the next euphoria.
For an investor with a life insurance product offering guarantees, experts say he/she should not react to market volatility and just continue to stay the course so that his/her long term financial goals can be achieved. Keep in mind that life insurance is a long term product, hence, short term volatility should not be a deterrent when it comes to paying premiums for savings and investment plans.
Harshad Patil, EVP and Chief Investment Officer, Tata AIA Life Insurance says “If an investor has invested in market-linked life insurance products for long term wealth creation such as ULIPs, they should remain invested and see through the market volatility and average out their investment by continuing to pay subsequent premiums on a timely basis.” Additionally, on a periodic basis, an investor can revisit their asset allocation to achieve an optimum asset allocation mix based on their current risk appetite. Patil adds, “It would be unwise to take knee-jerk action based on market volatility.” Policy-holders with term covers should ensure payment of premium so as to not lose life insurance protection cover.
In the life insurance space, traditional plans usually invest in debt instruments and are a good option for those who do not take risks, whereas, unit-linked plans (ULIPs) provide an exposure to equity markets where investors can get potentially higher returns. Unit linked plans are flexible and they allow investors to choose the funds in which they can invest.
Srinivasan Parthasarathy, Sr. EVP, Chief Actuary, and Appointed Actuary, HDFC Life says, “All life insurance plans are designed to provide benefits over the long term. There is a facility called ‘switch’ which enables investors to move their investment from one fund to another at very little or no cost. In the current scenario, ULIP investors can benefit as their monies are safe in professional and able hands and not exposed to human emotions and panic selling unlike in other open-ended instruments.” Therefore, staying invested and continuing payments in a regular and disciplined manner will help investors overcome the impacts of the current market movements. Parthasarathy further says, “It has been historically proven that market volatility gets evened out over the long term. Hence, stay focused on your long term goals.”
How to ensure financial security?
To ensure the financial security, the first step is to outline the investment objective. This will help investors shortlist the investment instruments best suited for achieving their financial goals. Chandan of Canara Robeco Mutual Fund says “Investors must realize that in a goal-based investment with a multi-year time horizon, market volatility becomes a friend.” He adds, “When investors take investment-decisions based on market sentiments, then they make themselves vulnerable to sub-standard returns.” Hence, a prudent approach during such volatile times would be to stick to the overall asset allocation plan.
Secondly, ensure that your investments are well-diversified; not only across asset classes but also within each asset class. Chandan says “At regular interval investors should review the portfolio and use tactical flexibility available in the allocation plan to increase allocation towards the asset class where there is a better opportunity. Since the uncertainty that led to attractive valuation may prevail for some time, investors can stagger their investments.”