The global economic upheaval caused by the coronavirus pandemic has resulted in widespread job losses and a sharp decline in business activity worldwide. Stock markets too saw steep corrections in early 2020, although some made an equally rapid recovery in the second quarter.
Indian markets are no exception to this pattern. The S&P BSE Sensex, which tracks India’s 30 largest and most actively traded stocks, fell as much as 29% from early February through the end of March. Then the index recovered 20% of its value between late March and the end of June.
High levels of market volatility bring both big risks and big rewards. We spoke to analysts about how new investors should approach this market. Here’s what they had to say.
Experts: Now Is a Good Time To Invest in Stocks
The experts we spoke with believe new Indian investors should take this opportunity to put their money to work in the stock market, if they were holding off due to fear of another downturn.
“A lot of the pessimism has already been included in market valuations, with most investors already factoring in worst-case scenarios,” said Nikhil Kamath, co-founder of Zerodha, one of India’s largest brokers. Kamath notes that markets are forward-looking by nature, and that pricing today has already baked in the bad coronavirus news, but sentiment could rapidly turn negative given new, unexpected developments, he warns.
Hemang Jani, head equity strategist, retail broking, at Motilal Oswal Financial Services Ltd, observes that in the wake of past major market declines, like the one we saw earlier this year, India’s stock market has historically delivered positive returns in the subsequent 6-month periods.
“There have been four instances, in the last two decades, of correction of more than 30%. In all four instances, six-month forward returns for Nifty 50 were positive while in three instances returns have been minimum 35% and a maximum of 46%,” says Jani.
And for those who had invested before this year’s downturn, staying in the market worked in their favor in many cases, as they were able to see their investments rise in the second quarter.
Jimeet Modi, founder of SAMCO Securities, saysthis time around, investors have demonstrated maturity by investing through the crisis with a belief that things will get better and they haven’t panicked as yet. Also, they haven’t jumped to sell, exit/redeem their investments because of the fear of the pandemic which is evidence of the fact that they have come of age.”
How to Get Started with Investing
Investing in the stock market isn’t as complicated as many assume it to be. It’s easier than ever before to open an online brokerage account and start trading. The first step is gauging your own tolerance for risk, then deciding what to invest in.
Investors may choose from these three main asset classes to build a balanced investment portfolio:
Stocks: When an investor is looking at equities investments, the option to directly invest in a company stock isn’t the only one. Depending on the risk appetite, investors can consider adding fixed deposits or simply starting a systematic investment plan (SIP).
Jani finds SIPs a good way to gradually build wealth in a way that limits the volatility in returns. He also advises allocation toward fixed deposits, which he considers safer than direct equity investments despite lower returns.
SIPs are investment vehicles offered by many mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums with a frequency ranging from weekly, monthly or quarterly investments.
Mutual funds, which may be a medium-risk and medium-return alternative to direct equities, are touted as the easiest ways to invest in the stock market according to Deepak Jasani, head of retail research, HDFC Securities Ltd.
Kamath thinks return-on-equity combined with the beneficial tax rates makes equity investments an attractive avenue to allocate capital at this juncture.
Bonds: Bonds, also called fixed-income investments, help reduce volatility in an investment portfolio. The returns are often lower than equities, but they serve well to investors who want to be sure of a return to their investment. In this category, you can choose from a host of government bonds that come with a sovereign guarantee.
Kamath advises allocating up to 20% of your investment portfolio in bonds. “I would suggest tax-free bonds like NHAI and IRFC, which currently yield a tax-free rate of about 4.8%,” he said.
Cash Equivalents: For investors who wish to consider investments beyond equities or bonds, financial instruments short-term cash equivalents can be considered.
Marketable securities and money market holdings are considered cash equivalents because they are liquid and not subject to material fluctuations in value. Commercial papers or short-term government bonds with a maturity date of three months or less also feature among other equivalents that are available.
Jani suggests adding in a part of the portfolio toward buying commercial papers, an unsecured promissory note with a fixed maturity. “The 1-5 year commercial papers look attractive as the Reserve Bank of India may follow up with more rate cuts,” says Jani.
Consider Building a Mixed Portfolio
A mixed portfolio would mean a combination of the three asset classes along with other instruments such as commodities, gold or gold ETFs and real estate-based investments.
Kamath advises a model portfolio that could include a 35% allocation to real estate, 35% to equity, 20% to fixed income, and 10% in gold, which could also act as a hedge on one’s overall portfolio.
Modi, too, bats for an asset allocation plan. “If an investor is 25, at least 75% of his or her assets should be invested in equity or equity-linked assets, and the balance in debt and fixed income instruments. Once a plan is in place, executing the plan and periodically reviewing and rebalancing the same are the best ways to secure a future.”
Jani believes investments should be linked with the future goals in such a manner that the investor does not have to scrounge around for money when he needs it. He suggests adding mutual funds, fixed deposits, gold ETFs and government securities besides equities to one’s portfolio.
Best Practices You Should Follow to Invest During Coronavirus
Experts think maintaining a cash emergency reserve is important in uncertain times like these. Some suggest setting aside 18 months of living expenses as a contingency cash reserve and then investing from the surplus beyond this. Some other basic best practices include getting external help, self-learning and actually experimenting.
Get a Financial Advisor
Dr. Mohit Batra, founder of independent equity research website Marketsmojo.com, finds the Indian stock market a safe haven for investments that requires a disciplined approach given the strict regulations. He, thus, recommends a good advisor to bring about the required discipline while investing.
“Plan your investment journey properly. Instead of chasing low brokerage fees, chase a proper advisor,” says Batra.
Invest Early
Modi thinks investing early is the best thing you could do – “That is the single most important thing that could change the chances of your financial success and freedom. If you haven’t started yet, you must begin without any further ado.”
Keep Learning about Investing
It is widely known there is no substitute for hard work and dedication for any investor or trader wishing to make money in the stock markets.
Jasani thinks stock markets can be vehicles of creating wealth, provided you learn the way the markets operate and how individual companies are valued – “Common sense, knowledge from reading books of investment gurus and tracking markets for a few quarters (ideally one full-cycle) will help in this regard.”
Armed with the right attitude, guidance and the zeal to learn the trick of the trade, Indians could use the opportunity that the coronavirus pandemic has presented to learn more about investing in the stock market.
