People invest where there are guaranteed returns, to protect themselves against market's excessive volatility
The current pandemic and the unprecedented events of the previous year have made us realize how important it is to have emergency funds with us. At the same time, we need an avenue to invest where our funds will grow and yield healthy returns even in the most challenging times. So, what are the investment options available to us to save and grow our money even in times such as the current pandemic? Broadly we have three investments avenues that can be explored:
1)Fixed Income Securities or bank fixed deposits 2) Equity Shares or stock market and 3) Real estate. We look at each of these to understand them better as investment avenues in the current 2021 scenario.
Should You Invest in FDs or Fixed-Income Securities?
To safeguard against high volatility in the stock markets, people invest in products that give guaranteed returns such as Fixed Deposits. However, bank FDs have some disadvantages.
The rate of investment in bank FDs is drastically low and has fallen from 8.5 per cent in 2014 to 5.4 per cent pain 2020. This is the lowest rate of all time on the FDs. The returns on bank FD deposits do not have any tax benefits. We may want to invest in instruments that give us a high-interest rate along with the benefits of tax savings. Another consideration when investing in FDs should be that the returns are higher than the prevailing inflation rates so that inflation does not eat into the principal and the returns of the investment.
One of the other options in fixed income includes some government of India (taxable) savings bonds. These bonds started on July 1, 2020, and provide 7.15 per cent returns. These bonds are available from designated branches of certain banks.
Should You Invest in the Stock market?
There are many reasons to feel hopeful about the performance of the stock market. Widespread vaccination is expected to help in the reopening of the economy and an increase in movement and trade. It is expected that the closed industries such as travel and entertainment will reopen soon and low-interest rates should encourage people to spend or invest, keeping the stock markets in demand. Also, during the pandemic, certain industries such as tech, e-commerce, biotech, and pharma have thrived and will continue to grow. So, while deciding whether to invest in the stock market, it depends on the sector and the company you choose.
The downside of stock market investments is that they are risky and fear over new strains of coronavirus could lead to sudden crashes that become apparent only in hindsight.
Investment in the stock market can be done both through mutual funds and investing in individual stocks. Investing in mutual funds through systematic investment plans is an option to consider. Healthcare, telecom, IT, and Retail are sectors that have benefited from the pandemic. Sectors like construction materials, transportation, financial services, metal, and mining may benefit from the opening of the economy, and investing in strong companies in these sectors is expected to bring good returns.
A few lessons to remember during the pandemic times is that we:
Do not panic: we should not panic and do knee-jerk reactions such as selling investments mindlessly and flow with the volatility of the market
Keep costs low: we should track the cost of the platforms from where we are investing money and choose the one that has the lowest costs
Make investments cautiously: we should make investments through research and in businesses with strong balance sheets and business models that seem to hold strong during economic downturns.
Wait for investments to provide dividends: since the economy is strained, companies may postpone paying dividends and stock prices may also show lower returns. We should wait for the upturn for companies to come back into more cash to pay dividends and generate returns.
Should You Invest in Real Estate?
Real estate prices have been down or stable since the past few years before the pandemic. Investors have shifted from using real estate as an investment option to consumption expenditure. Real estate investments, with the potential for metro towns to attract migration from smaller towns for jobs, have been in demand. However, returns in this sector too have plateaued and further investments, whether for own consumption or for renting should be done with care. The aspect that differentiates real estate investments from other investment options is the longer time required to liquidate the investment in times of need. Also, it brings in a massive investment in only one asset leading to less diversification of investment.
It is expected that the economy is due for a revival soon and there would be investment opportunities available for investors as businesses come on their own again. Investments should thus be done keeping a longer time horizon and a buffer for emergency funding that can be liquidated easily in times of strained and pandemic circumstances.
The author is Associate Professor, School of Business, Sushant University, Gurugram
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.