The first half of 2022 is almost over. It is that time when you can sit back to review your financial well-being. From the headline data, things are not looking good. The inflation demon has not only raised the head but is pushing up the cost of money. Last week, the Reserve Bank of India projected that it would likely remain above the upper tolerance level of 6% through the first three quarters of 2022-23.
There can be no more significant problem for your money than persistently high inflation. It takes away the value of your savings. The natural reaction is to put more into high-interest-rate instruments. Banks are quick to attract your attention by raising fixed deposit rates. The news is going from bad to worse for those looking at alternatives to hedge inflation. Gold prices usually rise due to high demand. However, gold prices have remained flat since January 2022.
A lot of you thought crypto assets could be the hedge. Since January, the value of bitcoin, the most popular one, has tumbled 60%, while stable coins like Ethereum are down 70%. This column cautioned about investing in crypto assets in October 2021. At that time, the International Monetary Fund’s Financial Stability Report warned of a threat to financial stability. Paul Krugman, a Nobel economics laureate and a columnist at The New York Times, wrote in his latest column that these were not replacement currencies, no hedge against inflation or risk diversification instruments. He called them ‘predatory junkyards’.
Equity markets are tumbling around the world. The S&P BSE Sensex and Nifty have shed nearly 10% since January 2022. However, Indian shares are doing better than other markets due to strong domestic institutional investors’ support. That needs to hold up for markets to remain relatively stable. It is hard to imagine that local investors would panic along with foreigners. According to most forecasts, India’s economy is expected to grow at over 7%. In such a situation, the profits of companies that depend on the country’s economic growth continue to grow. A survey of manufacturing companies by the Federation of Industry Chambers and Commerce of India FICCI last week noted that more than 54% of respondents witnessed a higher production level in the first quarter of 2022-23. The average increase in production was 10% for most companies surveyed. That is good news from a ‘jobs’ creation standpoint. The regular flow of money from the systematic investment plans in equity mutual funds and index funds is helping India cushion the setback of rising interest rates around the world.
Splitting your savings
There are interest rate and stock market cycles. You need to understand that equity share prices go through cycles but follow steady profit growth. Once you get the hang of that, you must think through it well. Identify your savings in two parts-the money you need now and the money you need in your later years. Build an emergency fund slowly by parking it in fixed deposits or liquid mutual funds. You can use a similar strategy for financial goals like down-payment for a home loan or buying a car.
The second part of your savings is the money you pay yourself for later. That money must find its way into equity assets. You must stick to that amount each month and keep adding to both buckets. You can determine the split by talking to an independent financial advisor. Your investments need to ally with your financial goals. Staying invested in equity assets and slowly adding to your systematic investments is a good idea for salaried individuals.
Those who buy or sell equity assets directly can look at the fall in the market as an annual sale. Good quality companies have shed value to get into a reasonable valuation zone. Very few analysts are saying that the market is now in an ‘attractive’ valuation zone. However, most stockbroking reports advise ‘accumulate’ for quality companies. That is an idea you need to work with too.
Indian shares are better off
Equity markets are tumbling around the world. However, Indian shares are doing better due to strong domestic institutional investors’ support.
(The writer is editor-in-chief at www.moneyminute.in)