Blog: Pandemic and your portfolio

Over the last three months or so, I have got so many distress calls from friends and family. Most of them were rudely awakened from their long investment slumber by the recent bloodbath on Dalal Street. And what I saw left me absolutely stunned – most of my friends are actually throwing their heard-earned money down the drain. Worst still, they do not even realise how they are jeopardising their future.

Loss and Loss Statement - I realised that the general investment profile of my friends is somewhat like this:

• Single largest investment in an apartment – either yet to get possession or got it recently and in both cases, the current market price is significantly below the purchase price
• Have an NPS but never bothered to be proactive about it
• Large amount in bank FDs (at least some return, who cares about inflation)
• Bought multiple insurance/ULIPs for tax savings – never calculated the return
• And SIP!! Yes, SIP seems to be the sole key to our golden future (and don’t ask SIP goes to which fund, that my RM knows, if you want, I will get the details and send it to you)

I was horrified to find that so many Mutual Fund portfolios are today worth 10 to 30% less than even their invested sum. That simply means instead of earning any profit, an investment of 100 rupees is worth just 70 today!

Not only my friends have never bothered to look at this, most of them do not have a clear financial plan, linked to their life goals. 

Plan First and Remember Inflation: Forget your Relationship Manager and the agent recommended by your friend, please sit down and calculate what are your life goals (buying a house, higher education for children, retirement corpus) and how much money you need to achieve these goals today. 

Then you need to add inflation to it and that completely changes the equation. If you think you need Rs 20 lakh for your daughter’s higher education after 10 years, then at 5% annual inflation, you would actually require Rs 32 lakh plus. 

Most of us today do not have the luxury of a life-long pension and we would at least like to maintain the present lifestyle. It is easy to find retirement calculators in the internet, please check it out today itself. Probably you would lose your sleep tonight but still I would say, most of you need this shock. 

No More Lazy Returns: Bank deposit rates are falling for quite some time now. Your FDs are going to earn hardly 6% now. Remember, here you need to subtract the inflation – so, again at an average of 5% annual inflation, your net income is just 1% (and yes, you have to pay tax on your interest income!!). 

The government has further added to your woes just before the crisis by slashing small savings (Post Office schemes, GPF/PPF) rates. After a series of co-operative bank disasters and NBFC crisis, very few brave-hearts will venture into small banks or corporate deposits for 1% extra gains. 

What You Simply Cannot Afford 

• To let your hard earned money idle in bank deposits, you actually do not earn anything
• You need a huge sum to finance your retired life – don’t be casual about it 
• 77% of Indian investment goes to real estate. As an investment, it is illiquid with high transaction cost. Evidence shows that nobody makes money consistently in real estate. Buy a house to live and not as an investment. 
• Don’t buy gold jewellery as an investment
• Never buy insurance for investment or tax savings, buy it for safety first
• And most importantly, today you cannot simply afford to stay away from the stock market. So, I suggest you at least learn to track your investment. 

What You Must Do

• For a financially secured future for yourself and your family, get a qualified financial advisor immediately. An advisor, not an agent (a doctor, not a quack)
• Identify your major life goals and then make an exhaustive investment plan with your advisor to achieve these goals
• Investments that are secured, do not by nature, offer you higher return. So, government bonds and bank deposits are mainly for safety. GPF is slightly higher return and PPF too (but a long 15 years lock-in period). 
• For fixed income, debt funds (they invest in government and corporate bonds) are better and more tax-efficient. But remember, debt funds are supposed to give you conservative returns. If a debt fund is giving you higher return that means the risk is higher (I had to break the Franklin news to a friend, who did not have the faintest idea what sort of fund it was and why her money was there).
• Apart from fixed income, invest a portion of your portfolio in gold ETFs/certificates. 
• But the major portion of your investment should always be in stocks. If someone had invested Rs 1 lakh in 1991 in Sensex, her investment would have become Rs 34.2 lakhs in 2017 (as against 11.2 in gold and 9.3 in debt). 
• Do not put all eggs in one basket. Always modify fixed income-gold-stock allocation as per your age/risk profile. Similarly adjust your stock market allocation.

Equity Allocation:

• Invest in index ETFs (they mirror the composition of Sensex/Nifty – the same stocks in the same ratio) for in-line return (and far less cost). 
• For better return (but higher risk), select a few Small Cap funds (check past performance and keep a hawk-eye on monthly performance). 
• You also need to find a few stocks, which you can hold over a long term (10 years) to maximize your return. If you are rich enough, go for a PMS (Portfolio Management Service, minimum investment 25 lakhs, often higher) or select a few good funds with such holdings. 
• Your advisor should be able to decide the ratio of these three types of funds (plus debt fund and gold ETF), based on your risk profile. 

These are just the basics. Unfortunately most of us never got to learn these. Sadly, your senior position in the government/corporate hierarchy or PhD in history or biotechnology cannot guarantee a financially secured future or a comfortable retired life. This crisis may have given you a real shock but I hope most of you wake up now and take charge.

(Anindya Sengupta is a public policy analyst and a student of economic history. His first book Laxminama: Monks, Merchants, Money and Mantra deals with the centuries old interrelationship of Religion and Trade in India. He blogs at http://thetimeriver.blogspot.com/)