The lockdown over the past three months due to the Covid-19 pandemic has disrupted the way of life. As such, it has changed everything that you do. From the way you run your household to the way you manage your work life and personal relationships.
Global agencies like the International Monetary Fund have warned of a synchronised deep downturn in 2020 for both advanced and emerging market economies. It is estimated that over 95 per cent of the economies would have a negative per capita income growth in 2020. That means individuals would make far lesser money than before.
“With activity in labour in terms of sectors like tourism and hospitality expected to remain subdued, a full recovery in the labour market may take a while, worsening inequality and raising poverty levels,” Gita Gopinath, the chief economist at the IMF said last week. Your money affairs are affected significantly. Your finances deserve your attention in the light of a subdued outlook for your income.
The ‘Short-term’ investments mythology
You need to do away with the concept of short-term investments. It is the most misused term that associates investing with ‘fast money’. There is no such thing as fast money. The only way you can make any real money is by beating inflation year after year by a margin. That is possible only by investing regularly in businesses through equity directly or through index funds or mutual funds. You have to give your money adequate time to bear fruits. Investing is all about letting your money grow by staying put. No matter the market cycles.
In the short-term, you can only protect your capital as they do not yield high returns. Any short-term investment return would typically hover around interest rates in the economy. The best short-term investment may offer a return that just about makes up for the inflation rate. On top of that, taxation is higher if you withdraw your money. So, putting money in fixed deposits of banks and well-known companies is just protecting your money and not investing.
So is keeping it in liquid and debt funds. Going forward, you have to tell yourself that putting money in fixed income assets is protecting it and not investing. There is no such thing as a ‘short-term’ investment. If you invest, it is for a long haul. Your priority right now has to be on saving more and spending less. A sharp cut in expenditure is needed if you have any doubts about your future income. A surplus each month is necessary to protect your future wealth.
For the long-term
If you are mentally prepared to understand the new dynamics of the investment world, then you may want to look out for options for some real investing. If you are financially aware, you may want to use the time during the lockdown and going forward to learn more about financial markets and multiple real investment options in front of you. Businesses rely on the economic growth of a country. They plan their business expansion based on their expectation of demand for goods and services.
In the light of a weak economic growth outlook in the next year, the sentiment for business expansion is likely to be subdued. However, financial markets have discounted the year 2020. The trend, thus far, indicates that equity markets are expecting a V-shaped recovery in the world economy. We have seen benchmark indices in India like the BSE S&P Sensex, and the NSE Nifty move from record highs to significant lows in March 2020. They have regained over 50 per cent of the lost ground.
The anticipation is of a quick uptick in demand for goods and services in the years beyond 2020. Effectively, today’s prices are reflecting profits that businesses would make in 2021 and 2022. You may want to tread with caution. It is always a good idea to seek professional help. Discussing investment prospects with someone who is an expert or reading up can help you zero in on investment ideas.
For those who are not into finance and not too keen to learn more, you can put money into index funds through a systematic investment plan. It is the most efficient and low-cost option for equity investing. You can create real wealth through regular index investing. American households did that in the 70s. You can do that over the next couple of decades.
Use the lockdown to research long-term bets
If you are financially aware, you may want to use the time during the lockdown to learn more about financial markets and multiple real investment options available to you currently. It is always a good idea to seek professional help. Discussing investment prospects with someone who is an expert or reading up can help you zero in on investment ideas.