FinBytes by Finwisor - Navigating through the Coronavirus situation
We hope and pray that all of you are doing great. Coronavirus has wrecked many uninformed investors' peace of mind. This week, we thought of addressing some confusion and fear going on about the equity markets.
Equity markets are incomprehensible.
While equity markets are known to be volatile, such high volatility is rare! It can only be explained by emotions of fear and panic. In the short run markets are guided by sentiments like greed and fear. In the long run, they are guided by the earnings of the underlying companies.
Such high volatility shows that equities are a gamble!
In the short run (<3 years), equities are a gamble for most. At the same time, equities adequately reward long term investors. Well-informed investors are able to generate much better wealth by investing in equities compared to any other asset class.
Should we redeem our investments?
While equity markets seem to be at good valuations right now, no one can predict if this is the bottom. They may still go down further. Redeeming right now due to fear is probably amongst the worst times to leave the market. Read more about market cycles
How should we approach finances now?
Here is an Indicative Strategy. While the ideal strategy will differ from person to person, these pointers will help most people.
1. An emergency fund is extremely important. At such times when there may be a higher probability of job losses and health expenses, its best to keep 6 months of expenses in aside in cash, liquid funds, FDs and arbitrage funds.
2. Long term investments (>5 years): Invest in a staggered manner rather than all at once. While staggering would differ for every individual, consider investing 20% of the lumpsum amount every week.
3. Medium-term investments (3-5 years): Invest in Balanced Funds for most. For aggressive investors, a higher equity allocation may be reasonable
4. Short term investments (<3 years): Invest in arbitrage Funds/ debt funds. For those who can take some risk, you may consider P2P investing after the coronavirus situations calms down.
5. SIP investors: Consider increasing equity SIPs if possible.
6. Dynamic investors: Increase allocation to equities as per your risk profile.
Hope this helps. Wishing you all good health and wealth!
About FinBytes
While most people understand the importance of managing personal finance, they are left with little time to do anything meaningful about it. So, we at Finwisor thought of helping. FinBytes are short 1-2 minute reads every week to improve financial awareness. Do make it a point to read these weekly FinBytes regularly to improve your financial quotient.
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