The financial year 2021–2022 is going to be a tricky one for investors. The second wave of Covid-19 has hit India towards the end of the financial year 2020–2021. With new curfew rules, the economy is taking a hit again. Investors are worried about yet another lockdown, and wondering about the consequences of yet another market crash. Many are pondering over the right amount of liquidity to hold on to, right now.

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In this blog, we are presenting our opinions on what investors can do, and how they can manage their money in this financial year:

START AN SIP IN EQUITY LINKED SAVINGS SCHEMES

We have always advocated investing via systematic investment plans. SIPs offer the huge benefit of dollar-cost-averaging to the investors. Investing through SIPs eliminate the effect of market cycles on the portfolio, in the long run. We have enough empirical evidence signifying the benefits of investing through SIPs. If you are a salaried individual, investing through Equity Linked Savings Schemes is preferable. ELSS schemes offer tax saving up to Rs 1,50,000. Investing through a SIP in an ELSS scheme will provide both — great returns, and lesser tax liability.

TAKE ADVANTAGE OF LOWER LOAN RATES

At Tarrakki, we believe that the lending rates won’t go down further from the present level. In fact, there is a greater possibility of lending rates rising. Inflation is expected to rise, presenting the perfect environment to borrow. If you are planning to take a loan, this is the right time. Increased inflation in the future will prove beneficial for those who borrow today. It is time to compare the lending rates offered by different banks and choose the lowest lending rate. If you’re already paying installments to a bank at a high rate of interest, you can refinance the loan and save the difference.

GOAL BASED INVESTING

Consult your investment advisor, share your goals with them, and invest accordingly. Investing in markets is as much about the returns as it is about the time horizon, liquidity requirement, risk appetite, and risk expectations. The timing of investing and withdrawing is very crucial. In case you haven’t invested via SIPs before, and find the markets undervalued or at a trough, you may also consider investing in a lump sum. Smart lump-sum investing always helps, especially if you know how to time the markets well. Since this is tough to do, we suggest investing through SIPs. An investment advisor can analyze your individual case and give you the right recommendations.

DIVERSIFY

Diversification may be seen as an acknowledgment of the fact that we may be wrong at times. The markets are expected to remain volatile, given that there is no end to the pandemic in sight. In such cases, a well-diversified portfolio is extremely essential. This is not a good time to go into specific sectors or specific asset classes. The markets are volatile and can make you pay heavily for choosing a concentrated portfolio. If you are a mutual fund investor, diversification is a must, both at the asset level, and the constituent level. One must take care not to over diversify, as it may increase costs. Consult a good advisor who will help you decide on the correct mix for you. Consider venturing into alternative streams of investment as well.

TAX PLANNING

Apart from investing in ELSS Funds, there are several other avenues available, such as EPF (Employee Provident Fund), PPF (Pubic Provident Fund), and National Savings Certificate (NSC); all these avenues offer tax benefits. These avenues are preferable for investors who want stable and guaranteed returns. Empirically, ELSS has provided higher returns than the others mentioned above. The other instruments also have longer lock-in periods. If you are selling a residential property or land, the huge capital gain taxes can be averted simply by purchasing capital gain bonds issued by government entities.

KEEP LIQUID ASSETS ON HAND

This year we’ve realized the importance of having liquid assets and emergency funds. We highly recommend building an emergency fund for any contingency that may arise. You can invest a sum of money of your choosing in liquid securities, every month. In order to receive better returns, we recommend investing in liquid funds or money market funds instead of holding on to cash in your savings account.

NEVER BUY INSURANCE AS AN INVESTMENT

Insurance is a risk transfer product and not an investment. Many insurance products which look like investments may not be financially profitable because of their comparatively lower returns. Thus it is imperative to have your goals clear. If one wants risk transfer for any specific probable catastrophe, going for insurance makes sense. But one shouldn’t look at insurance as an investment option that provides good returns, because better avenues that provide significantly higher returns are available.

AVOIDING HIDDEN COSTS

When investing in regular mutual funds, the expense ratio will be high because it includes the brokerage paid by the fund house to your broker. For this reason, we insist on investing in direct mutual fund plans. The difference in returns will lead to significantly higher wealth creation as compared to regular mutual funds. If you are purchasing gold in the form of jewelry, there are huge hidden costs like GST and making charges. Thus, for the sole purpose of investing, one may go for ETFs whose hidden costs are lower.

When it comes to investing, one can always use external circumstances to your advantage. All that is needed is some foresight about how things might be a year from now. Very few people possess this foresight; this is where a financial advisor can help. In closing, we’d like to iterate that diversification is super important, and venturing into various investment avenues such as the commodity market, can be very beneficial. Do take some time to analyze your own risk appetite, life goals, and financial goals before you rope in a financial advisor to help you out.

The writer, Saumya Shah, is the Founder of Tarrakki, a new age comprehensive wealth management application. Views expressed are personal and do not represent the views of Tarrakki.