The whole world economy is under the peril of the COVID-19 pandemic. BSE fell drastically by 30% from its peak value which it attained in January. The reasons for this downfall vary depending on various situations but the basic tenets remain the same. So here are a few tricks and tips on what top investment approaches you should do during the current market crash (Coronavirus) to recover the loss you incurred.
Next Action Plan to Revive your Stocks
1. Make a Financial Cushion
During this time the huge economic slowdown can crush your income as well. You need to create a contingency fund to cover the expenses of 6 months. If you have any credit or loan amount taken, then you need to pay that before making any investment. So, if you are looking for a financial cushion, then you may end up paying an unexpected amount by borrowing. It can be your credit card bill, a financial personal loan from your friend, or an overdraft- everything will be added to your debt.
The size of the cushion depends on lifestyle. It might be the biggest emergency costs which you have to pay that cover household, cars, travel, etc, and try to be the least match cost. After six months, if you face interruptions like a restriction to income flow, loan paid to the family member as and when required, or if you face any major financial crisis, you need to spend your cushion by placing your savings on hold till you restore your fund. So, it is advisable to build a contingency plan to cover the expenses for 6 months.
From the company’s point of view, a Liquidity Cushion of cash reserved instruments will refrain the company from selling most of the liquid securities at a loss for raising cash to fulfill the short term obligations such as paying bills, wages, repayment of loans, etc.
2. Revaluate Risk Tolerance
During the good times, we become too much satisfied and don’t repose any idea how much the stocks will falter and the investment will suffer during the slowdown. If you find your position in the graph of the bear market, you won’t incur too much loss. So, it’s time to take a look at your risk profile so that it gives you a clear understanding of the accurate values. You need to know how much risk you will be taking and what kind of risks can make you anxious.
Fig 1.1: One-Dimensional Risk Tolerance Assessments
The standard way to find out the risk tolerances is to ask the investor a series of questions. This will cover the time horizon, the requirement of income, along with the urge to sustain the market volatility as well as comfort level. These will be categorized under two heads which include risk capacity which covers “risk capacity” and “tolerance” of market risk. Scores of these risk capacities as well as tolerance questions will be mapped together to form an appropriate “Portfolio” and associated investment policy statement. The High Scores will lead to Aggressive Portfolio. Moderate ones indicate a Moderate Growth Portfolio and a Low Score indicates Conservative Portfolio.
3. Try to Fight Back
Investors lack the confidence to deposit back in the market even when the situation normalizes. When the market recovers fully, they end up on the backside. So, it is not at all advisable to stay on the sideline. You need to invest at times which is called staggered entry. For example, your initial investment is $20,000; then what will you do? Many investors try to invest all or majority of it immediately. You make sure you don’t miss out on that and keep investing. So, if you refrain yourself from investing and wait for the market to normalize, then you might be a little backward in terms of investing when the market actually revives. In those cases, you can make a staggering entry but in those cases, there should be sufficient cash in hand.
Always try to put back your money for a long term perspective. Look at your portfolio to find out what amount can be liquidated to start a beginning. You can invest some of your existing debts to initiate the cash flow for the time being. Therefore, always try to put your money at work. You can invest your money for a long term perspective which seems to open a wider opportunity. Detect the portion of the portfolio which can be liquidated to provide the required momentum. For example, certain existing funds can be used to initiate cash flow. If you are initiating an STP from the debt fund into equity for a period of 6-12 months, then you can utilize a lump sum in several phases apart from existing commitments as per the expert’s opinion.
4. Make your Financial Plan Ready
Investments are driven by various moments and it will be a portion of the process over time. When there is no proper plan there will be chances that you will get assimilated investments for the portfolio and you will end up taking hasty decisions. You will end up taking long term investments that might hamper the career goals. So, if you don’t have an apt plan, you can create one, and following that can be the best chore for you. This can be the right time to take care of your health and get some clarity on financial goals. Below are the points which you should consider investing in an emergency fund, Systematic Investment Plans (SIP), and Continue investments in Gold. Even if long-term SIP yields poor returns, stay committed. This is because past data shows that if you continued your SIPs for a bit longer, your returns would have been significantly better.
Figure 1.2: Percentage Change in Return from SIP
Don’t Review your Funds Now
If you are searching for the Portfolio value which is dropping every day, stop now. You will be identifying faults in individual bets. So, it is essential to refrain from looking for Portfolio at this point in time since it might misguide you. It might happen that the equity fund seems to be a worse choice for investments in comparison with the gold fund. You will end up drawing out money from equity and redirect the same to the gold fund. Any sort of review at this juncture will be solely dependent on the asset allocation perspective. Change in asset mix from the desired levels will cause a rebalance in the portfolio.
There are various mid and large-cap funds that cover schemes from various categories. Among the funds, Aditya Birla Sun Life Treasury Optimizer Plan and SBI Treasury Advantage is position as Banking and PSU funds. ICICI Prudential Regular Savings and Sundaram Income Plus are called as credit risk funds. Unless the real identity of these schemes makes you uncomfortable, you can ignore them. If you like to invest then, mid-caps stock can be the best chore for you since it involves much more liquid money compared to small caps. Companies holding such stocks have a reputation and investors can trust their shares. Moreover, they have a very good position in the stock market that helps in exploiting the best of both ends i.e risk modernizations and substantial returns. They also help in creating a diversified portfolio.
Figure 1.3: Position of Large, Middle, and Small Cap Funds
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