Back to the future
It’s in 2050. You’ve just put down your simulated cup of coffee that auto-refills every time you crave caffeine. But first things first, you’ve got to make your daily wage. You wear your VR headset to watch an interactive movie. You’re the central character and you have to buy and sell stocks as the story progresses (Yes Bandersnatch got all too real). Your Tuesday morning #richnnessscore goes down 2% and you’re shifted to a lower floor for the rest of the day.
Fine. Got a little ahead there. Where were we again? Oh yes, burgeoning digital India that was fueled with giddy optimism about investing, after our resilient response to the global recession. The investing industry’s AUM hit a milestone of ₹10 Trillion in May 2014, while AMFI ran a ‘Mutual Funds Sahi Hai’ campaign to encourage people to shift from physical savings to financial avenues like investing in stocks and mutual funds.
By 2015, SIPs had become the bold alternative to bank FDs. Take, for instance, this article in a leading publication that claimed ‘This lakhpati started with an SIP of Rs 500 in an ELSS mutual fund’. While this story might sound outlandish, it reflected the pulse of the markets and the outlook of the people during the time. Uma Shanker was a representation of millions of Indians relying on tips-based investing for quick gains.
Suffice to say, these investing attitudes were mostly status-quo until television sets flashed with ‘Breaking news’ headlines on 8th September 2016- the demonetisation announcement. A moment probably reminiscent of the emotions that were triggered in 1991 (Ahem, if you don’t know what we’re talking about, you should read this piece).
This move galvanized more money to flow into the markets, as with more money chasing limited assets India’s gen X started pouring their household savings into financial assets such as equity, debt, deposits, and insurance. The markets were soaring higher than ever before, and retail investors were high-spirited about the steady rise in their money. It felt like all was still kosher.
A rude awakening
After a period of considerable merry in the markets, things were starting to wobble rather uncomfortably. Investors went from soaring to shaky real quick when the ILFS, DHFL, and YES Bank fiascos came to light. The scam at IL&FS started to raise questions after several group entities defaulted on repayments due to severe liquidity problems. Mutual funds that invested in IL&FS debt paper stopped encashments.
Next, DHFL, the non-banking finance company stopped acceptance and renewal of fixed deposits. Eventually, DHFL’s stock took a hammering, by as much as 60%. Finally, there was YES Bank which capped deposit withdrawals after RBI imposed a 30-day moratorium on them as they faltered on NPAs and their share price went down.
The nature of these debacles started to raise questions about NBFCs and the safety of one’s principal. The terror following these events wasn’t widespread but surely started to dent people’s trust in the machinery.
The plot thickens
As if this tumbledown wasn’t enough, no one was prepared for what the universe was going to throw next. As the historian, Will Durant rightly said, “Logic is an invention of man and may be ignored by the universe”. And boy has this never rung truer for retail investors whose portfolios were hit by the COVID 19, which was the final nail in the coffin. For a lot of millennials, this was their first taste of financial debauchery gone wrong.
The pandemic brought upon a crushing realisation- Investment truly is subject to market risk and it also means that you could be risking your principal in times of a crisis. It’s like Morgan Housel says in his blog, “The biggest risk is always whatever no one is talking about or thinking about because by definition they’re not prepared for it”.
Rolling with the punches
The pandemic brought about a slew of contradictions that started to baffle retail investors like never before. Quantitative easing by governments across the globe put money in everyone’s pockets and revived the markets despite the massive economic slowdown. This also led to a decoupling of the stock market and the falling economy.
Despite the nature of the events that were unfolding, the message to retail investors was clear; Re-evaluate how you treat your investments. While we’d love to tell you we have the magic formula to protect your investments, we really don’t. What we do have, however, is a bunch of ways to diversify your portfolio and invest in various asset classes that you probably haven’t looked at.
- Cash and cash equivalents – In the current state of affairs, where we’re seeing a distinct divergence between the economy and the financial markets, keeping a portion of your money liquid in the bank or invested in safe liquid funds might not yield stellar returns but will keep your principal safe. But a word of caution: while choosing a bank, the one that’s offering the highest rate of interest might not be the safest. So make sure you exercise due diligence.
- Exchange Traded Funds (ETFs)– This is the best route to passive investing. In a market as volatile as this, it seems somewhat preposterous for fund managers to place long-term bets. ETFs that track an underlying index and provide a lower cost/income ratio are a safe bet.
- International market funds– These might help you stay largely insulated. A great by-product of the digital economy is increased access to international funds. In an emerging global landscape, one would be uncircumspect to not invest in FAANG (Facebook, Apple, Amazon, Netflix, Google).
- Credit risk funds– These carry higher risk, but their short duration reduces interest risk. They also have the potential to generate 2-3% higher returns compared to the risk-free papers based on the historical returns.
There’s another important piece of the investing puzzle that most people tend to overlook. It’s called ‘risk profiling’. i.e the level of financial risk you’re emotionally comfortable with. You also need to assess the level of financial risk you can afford and the returns you’re looking for. You can read about it here.
While these options are a great way to take stock of your current investment bearings, we foresee a landscape that’s going to be solution-based rather than product-based. A platform that aggregates your account, automates the rebalancing of your investments, and allows you to have a holistic view of all your financial decisions. Until then, it’s best you pull up your socks. Or build a time machine.
Oh, looks like my simulated coffee cup has filled itself up, brb.
In this article
This is a companion discussion topic for the original entry at http://jupiter.money/resources/a-retail-investors-tryst-with-the-markets-part-2/