Investing in a Pandemic Situation During Covid19
The Indian Investor’s Dilemma
Investments are most important for a person to sail through crisis situations. Savings are done in order to mitigate risk and to be able to encash on them in case of need. Often, they are of no use because they become worthless when you actually need them. There are two pertinent questions during the current crisis in the world. What has been the pattern of investments of people during this time? How have they survived?
Types of Investments for Selection
One of the important aspects of savings is that investments should be made by diversifying them into various avenues. It is important to note the type of investments that can be made
Fixed Deposits in Banks: Fixed deposits are the safest but it is also of not much gain to the investor.
Equity Shares: Equity shares are very remunerative and have a double benefit. They have the advantage of the annual dividend to shareholders out of the profits of the company and the capital profit made out of the difference between the purchase price of the share and the market valuation. This is in the case of long-term investors.
Trading can have high profits but also serious losses. Moreover, if it is trading in the short run then the advantage of dividends is lost and an investor is only able to make capital profits.
Both long term and short term gains attract tax and so the advantage must be calculated taking into consideration the tax and the inflation in a country.
Bonds and Debentures: These are fixed interest securities and an investor gets a fixed return on his investments, whether the company makes a profit or a loss. The advantage is the continuous nature of the return and so the expected amount is received every year. Bonds range from plain vanilla Bonds with annual coupon rate to several financially engineered securities with many features.
Mutual Fund Securities: Mutual Fund securities may be the open-ended types that can be purchased and sold every day based on the Net Asset Value of the Fund. There is an opening price and a closing price and the amount is easily realizable. It is highly liquid but the price increase or decrease is slow and a person makes a low profit or low loss in case the market is sluggish.
The closed-ended funds have better investible value but there is a closed period when an investor cannot take out his funds when he requires them. He gets his funds only when the maturity period comes. Mutual Funds are the backbone of India. Every middle-income investor wishes to invest in their securities as they are safe for an investor.
Mutual funds are based on stock market valuations, so when the market does well and the Index rises the fund does well otherwise not. However, the securities are diversified and the fund managers look into permutations and combinations so that they do not have high losses.
Gold: Gold is a very desirable option for Indians. They love to hoard gold and ornaments made of gold. It is considered as a great investment that beats inflation and also gives capital profits. However, it has to be kept for a long time safely to make good profits. Gold is therefore considered as an option to sell it when in need of funds and not otherwise by average Indians.
Silver: Silver is also like a family heritage. People love to flaunt silver in their homes and buy products and artifacts as well as silver coins in festivals. It is also distributed during weddings as gifts. It is used as a safety vault and when people need money they disinvest and it is another way of making capital profits.
Real Estate: Property also does not yield good returns in the short term but are safety vaults for future use. You are required to be long term investors when the value of property increases and people make high profits. Normal average households do not see inflation, risk, or taxes. They usually evaluate with the high returns which they are able to get after a number of years.
Investments and Pandemic COVID 19
let us see how the investments have behaved from February to October 2020.
Fixed Deposits: Banks have done very poorly. They have no funds. People have been withdrawing money as they have lost their jobs or have a reduced salary. The banks in turn have brought down the interest rates of savings deposits of people. The maximum rate offered is now for a closed period of 5 years which is just 5.5% and short-term rates are down to 2.75%. So the investor cannot keep his money for a year-long period and hope to get a good return. Also, they are in a mood to withdraw rather than save in banks.
To stabilize the economy, the RBI reduced the repo rate by 75 bps in March and also the cash reserve ratio maintained by commercial banks by 100 bps. The banks became flushed with funds. However business has been at a low ebb and there is no one asking for loans.
Equity Shares: It was expected that equity shares would fall and the investors would lose money. On March 30th the closing date of the financial year 2020, the BSE SENSEX Bombay Stock Exchange index fell by 9,000 points to 28,440 from 38,297 as on Feb 28th and the(National Stock Exchange)Nifty index lost 2,900 points to 8,281 from 11,201 during the same period.
This was the time when investors should have bought shares and not sold them but since they were afraid of losses, investors began to sell their shares. At this time many shares were far below their valuations. These shares were mostly of small-cap and medium cap companies.
However, large-cap did not fall to a great extent. Prices of equity shares of the Information Technology companies (IT) sector, FMCG sector, and pharmaceutical sector did exceptionally well.
Tata Steel, followed by Bharti Airtel, L&T, M&M, Bajaj Finance, HUL, Reliance Industries, TCS, Nestle India, Tech Mahindra, Dabur were among the top.
On October 9th, 2020 Sensex and Nifty have both recovered. Sensex is at 40504 and Nifty is at 11914. This is the 5th continuous day of an increase in the index.
Bonds, and Debentures: There was an effect in the bond market as there was no new demand or issue of new bonds during the pandemic in India. The existing bonds with a fixed interest continued and individuals remained invested in it.
Mutual Funds: The mutual funds have been a stabilizing force in the Indian market during the pandemic. The Systematic Investment Plans have collected a huge reservoir of funds and they were invested by mutual funds in the stock market keeping the demand and supply for the stocks in an active mode. The investors in large-cap and long term plans were quite stable.
Gold: The price of gold has increased manifold during the COVID pandemic situation. In February it was Rs43000 and now it is Rs51540 for 10 gms of 24carot pure gold. Investors like Jim Rogers, the American investor predicted that price would rise as people had lost confidence in the government of their country. In every epidemic or war, the price of gold has always increased. Due to the hoarding of gold, the price of gold shot up.
Silver: Silver was around Rs 51500 per kilo during February and March and now it is Rs 61400 per kilo. Again Jim Rogers was buying silver continuously as he hoped to make a profit in it. Other investors followed him to make profits. Silver is expected will rise further.
Real Estate: is actually bleeding in India. People who have invested in it have made heavy losses. In India, there has always been a trend of rising real estate and then flattening the curve. Real estate was already at a low ebb since 2019 and it went down further. People in real estate have lost money heavily as the estate owners could not deliver the product. They had already taken heavy loans and the demand fell thus creating a disturbance and heavy losses in this sector.
Key Take-Aways
#1: The equity markets in pandemics usually fall and a bear market emerges but in India, the stock market kept rolling in demand and supply of shares.
#2: Gold continued to rise in India. This has always been the case in world economics, during the first and second world wars the price of gold rose and everything else turned to dust. The behaviour appears to follow the same pattern as the confidence level in governance becomes low.
#3: Gold was to a large extent was herd mentality not only in India but other Asian markets like Taiwan and Vietnam too. Jim Rogers the American investor also advocated it.
#4: Those investors who had diversified their funds stood to gain as gold and silver prices rose and equity shares too especially in It, FMCG and Pharmaceutical sectors did well.
#5: Mutual funds kept the stock market active. The large amounts received by them on Systematic Investment Plans was invested in the stock markets in India to stabilize it.
#6. The stock markets in India have recovered to the same level as it was before the pandemic.
Final advice to the investors. Do not invest in one product Stay Diversified, buy different types of products and have a basket of portfolios for success. Do not follow the herd mentality. Stay safe and happy for a secure future.