How to manage wealth effectively during the COVID-19 crisis

Having a robust strategy to manage one’s wealth not only with the objective to secure the capital, but also to generate desired returns is the need of the hour.

wealth management, covid-19, How to manage wealth during COVID-19 crisis, Equity markets, smart tips to manage wealth, Gold Investments, international investments
In order to manage your wealth profitably and effectively during times like COVID-19, the first and foremost thing you need to keep in mind is to reassess your financial goals and objectives of investing.

The Covid-19 pandemic has brought economies across the globe down on their knees as most countries imposed a strict lockdown to protect their citizens, flatten the infection curve and prepare infrastructure to manage the contagion. The already slowing global economy has now come under added pressure due to lack of economic activity. In spite of the overwhelming stimulus provided by Central banks around the globe, companies are still struggling to survive the downturn, there is surge in unemployment, revenue losses and financial insecurity etc which in turn has it’s impact on the financial markets and investment portfolios. Equity markets are still down ~23% from its CYTD20 peak. The war against the invisible enemy is pushing global economies to the brink of the worst recession in almost a century.

In such a situation it is normal for investors to be worried about managing risk and protect their wealth. Investors across the world are concerned about the declining value of their investments. What exacerbates the situation is the uncertainty about how long this pandemic is going to last.

Hence, having an appropriate strategy to both protect and grow one’s wealth is critical.

As an individual investor, you can use four simple and smart tips to manage your wealth effectively, in COVID-19 crisis and beyond.

1. Define your Investment Policy Statement (IPS)

The first step to create a durable portfolio is to clearly define your investment policy statement and have the discipline to adhere to the same. Investment policy statement should cover key aspects like investment objectives, return expectation in line with risk tolerance security or asset level restrictions (if any). The IPS should also state risk management limits on instrument, sector, manager and asset class level which can help to create a diversified portfolio across non-corelated assets. Following an IPS will ensure that risk is managed on a portfolio level which can cushion large drawdowns to certain extent. Also, an IPS instills discipline in the investor to follow the stated asset allocation at all points in time.

2. Consider risk on investment not just returns

Investors are too focused on higher returns without realizing the risk that comes along. While evaluating investment opportunities, it’s important not to be blindsided by the returns but also consider the worst drawdowns that the investment can have and its impact on your portfolio.

3. Equity investments with staggered entry on dips

Equity markets recovery is linked to recovery in corporate earnings which will depend on economic recovery. We expect economy and market recovery to be U shaped i.e. over 1+ year as economy gets back to normalcy. The equity markets have been very volatile in recent times. This volatility, however, also provides opportunities to invest in fundamentally strong companies at attractive valuations or Diversified portfolio through Mutual Funds and PMS. Investors can look for opportunities to buy on dips in a staggered manner over a 6+ month time-frame. This will help investors build equity exposure in their portfolio with an investment horizon of more than 3 years.

4. Stable and high quality fixed income portfolio

Fixed income securities / instruments provide stability and diversification to the portfolio. While equities have seen a considerable drawdown, fixed income funds have done well in a declining interest rate environment. Investors can still look to invest in fixed income avenues like high rated corporate fixed deposits, corporate bond funds, Banking and PSU Debt Funds, short-term debt funds etc., with 1+ years time horizon. Investors can also consider Debt alternatives like Arbitrage and Absolute return fund with time horizon of 6 months to 1 year.

5. Invest in Gold

Gold is a safe haven asset and investment in gold can be particularly meaningful during times of systemic risk. Considering heightened global economic uncertainty and low to negative interest rates across the globe, gold as an asset class should continue to do well. Investors can consider buying Sovereign Gold Bonds that generate an interest income of 2.5% annually with gold prices linked upside.

6. Diversify portfolio by investing in global opportunities

Investing in international equity helps in diversifying your portfolio and provides access to opportunities across the world. It also opens opportunities to invest in companies dealing in technology & healthcare innovation, and other sectors that may not be available for investments in India. For instance, investors can consider adding US equities and technology-oriented funds in their portfolio. Depreciating INR will also add to return.

To manage your wealth well and effectively during any crisis, it is important to take a long-term view, define and adhere to investment policy statement, diversify your portfolio across asset classes, that is not putting all your eggs in one basket, simplistically speaking. It is also important to continue to reassess one’s risk taking capabilities with changing circumstances, so that one doesn’t end up losing their hard-earned money. Protecting portfolio downside by actively managing the risk will go a long way to generate superior and consistent returns.

Similar to crises seen earlier, human race as well as markets will emerge strong from COVID-19 too. Diversification and regular assessment of investment portfolio is the mantra to tide the tough times!

(By Yogesh Kalwani, Head – Investment, InCred Wealth)

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First published on: 17-06-2020 at 10:08 IST