The path ahead is fraught with risks. With a war breaking out in one part of the world, financial markets worldwide are trembling. There is fear across equity, bonds and commodities markets. Over the past month, gold prices jumped 10%, and the S&P BSE Sensex is down 5.7%.
X`X``Commodity prices are surging, with indices that track global commodity prices showing a 50% jump over the past 12 months. Every $10 per barrel increase in oil prices meaningfully increases inflation in India and cuts economic growth.
The World Bank and the International Monetary Fund, the two global development institutions, issued a warning over the conflict in Ukraine. They said that rising commodity prices risk further fuelling inflation and hurting the poor the hardest. “Disruptions in financial markets will continue to worsen should the conflict persist,” the statement said.
According to some reports, a global financial crisis could follow the conflict in Europe. Long-term investors like pension funds in the US and Europe that have exposure to Russian or Ukrainian assets like equity or bonds could pull out.
They would sell at a loss and cover up book profits in other markets. That could cause a ripple effect across financial markets. The emotion of fear is overpowering markets now, and it is likely to continue for some time. Against such a backdrop, your savings and investments would not be able to escape the turmoil in financial markets.
Review your investments
You may want to keep sufficient cash or liquid funds in the bank for now. Do not rush to invest that idle cash unless the volatility in the financial markets settles down. It is essential to give that call to your financial advisor. An assessment of your portfolio would give you the risks your money faces. Your financial advisor may be able to guide you through the phase. A balanced asset allocation helps diversify risks. If your investments are skewed towards risky assets, you may want to do a course correction.
Work on a passive second income
There is no concept of social security in India like it is in wealthy nations. In many countries, people get an unemployment allowance. In times of crisis, you feel the need to have a second income. You may belong to any field other than finance. But you need to know a few basics when you set out to realise your dreams.
To protect your future from market volatility or uncertainty due to war, you need to have a steady income. While your day job can earn you a salary, you can regularly generate a regular passive income. When starting to invest, they say you must pay yourself first.
That means you have to put aside money every month towards a pension plan. The National Pension System or NPS is an excellent way to start. Your financial advisor can help you get started with it.
If you earn more in your present employment or take up a part-time gig, you can increase your income. After working for 15-20 years and investing regularly, you can quickly put your savings into a monthly income plan.
You can add more funds each month to that monthly income plan and further push it up as you continue to work. A simple back-of-the-envelope calculation suggests that you can generate a passive income of Rs 70,000 to Rs 80,000 per month from an investment of Rs 1 crore in India.
Understanding market cycles
While confusion persists over the direction of markets, you must understand that there are economic and market cycles. People who have witnessed multiple crises over their lifetime know that there are opportunities to buy when everyone gets fearful. If you are new to the world of investing, you may not want to buy anything now.
However, you may focus on learning about the impact of such events on your money. A panic selloff in one market triggers a Mexican wave across asset classes and continents. While predicting the bottom of the market or an economic cycle with precision is tough, you can know more about the pattern. That exercise would prepare you for the next round of crisis.