It is not an unfamiliar fact to the Indian citizens that the Indian economy is hitting a rough patch, with slipping GDP, interest rates, the collapse of the automobile and real estate sector, rising Non-Performing Assets (NPA’s) of the banks and sluggish consumer demand. With speculations of the arrival of a global recession, economic activity is at its minimum; investors are too cautious of giving away their hard-earned money to untrustworthy or potentially loss-making sources. Despite this prevailing suspicion, diversion of funds from surplus areas to reliable deficit areas becomes quintessential to pull the economy out of this downturn. But the question remains how?
One of the basic mantras is to invest in companies having a low debt burden and a healthy cash flow, who have a good past track record of payment i.e. blue-chip companies. One of the safest areas to invest is in a company dealing in consumer staples and healthcare, as these are the last products a family will cut off from its list, and thus the demand is highly inelastic. In contrast, companies dealing with discretionary products like automobiles and entertainment shall face a low consumer sentiment, thus making it an unprofitable investment avenue.
Then comes the basic rule of investing, do not keep all your eggs in one basket. However, this rule becomes golden at the onset of a recession, given the extra high volatility in the rates and prices of different stocks and commodities. One can consider investing in the all-rising gold as well, through gold Exchange Traded Funds (ETF’s) to avoid loss of making charges worth a hefty 30% and maintaining liquidity and safety.
The investors need to understand the ‘modern portfolio theory’ wherein Harry Markowitz emphasizes that low risk and high return instruments should be a priority for the investors. It says that risk is inevitable in case of any sort of payment or investment, however, the true art of an intelligent investor is to minimize the same, along with earning a fair return.
The asset allocation of an investor should purely depend on risk tolerance, time horizon, and investment goals. For example, if a 30-year-old person, with two dependents, takes a decision to have his portfolio with an 80:20 ratio of equity and debt, it might not turn out to be in his favor, given him being the sole bread earner and his money invested in a highly unstable source- he shall not be assured of a reliable source of income, which he requires to pull off the expenses of the entire family single-handedly. He needs to be more secure and fool-proof with his investment strategy.
Then, the time horizon for investment also deserves a significant amount of attention, as a need-sufficiency mismatch at the time of recession is the least one calls for. For example, if a father wants money for his daughter’s wedding after 6 months, it will be insensible to invest his money in a highly illiquid asset like real estate.
Discontinuing SIP’s in case of the downturn is the biggest mistake of an investor, as they fail to accumulate more when the prices are low. Due to the low market sentiment and stock prices, the NAV’s of mutual funds go down, fetching the investor more units. Thus, at the time of economic recovery, the investor will be left with a huge adequately priced corpus.
For all those investors, whose stomach cannot digest regular ups and downs, markets do provide hybrid funds. They provide investment into more than one asset class, like stock or bonds i.e. a mix of two or more elements. For Example, Fidelity Balanced (FBALX) is a type of moderate hybrid fund that allocates 65% to stocks and 35% bonds.
One major precaution that investors should take is preventing themselves from giving in to the lucrative offers by housing finance companies (HFCs) and buying real estate. This sector is facing a huge slump as these HFC’s are trapped in debt or a liquidity crisis. Long term projects being stuck, illiquidity of HFC’s are lowering demand in this sector, which further worsens its conditions, leading to a vicious cycle.
Experts suggest around 10-15% of the recession portfolio can be focused on international equities. US-based stocks help the investor in creating diversification into an uncorrelated market. It benefits the investor hedge currency risk, as rupee is very well depreciating against the dollar, and this gets added to the NAV of the fund. If an investor is able to inculcate some of these pointers in his investment strategy, he’ll be easily able to survive this downturn and rather emerge out with higher income. As every drop counts, such changes would surely accumulate and may enforce a positive sentiment in the economy, pushing itself out of the slowdown.