The learnings from FY-21

The FY-21 will be one of the most memorable year in every one’s life. It was most challenging, disruptive and unpredictable and affected almost everyone, it also breached all boundaries of imagination and forecasts. Most of us will agree with me that it was one of the toughest years of our lives as far as investing is concerned. The S&P BSE Sensex was at 29,468 on March 31, 2020, and is at 49,509 as on March 31, 2021. From the lows of the market to its life time high, the year not only taught us a great deal about investing behaviour, but also imparted some crucial life lessons. So let’s learn some lessons from this most unique and toughest years, and how to take advantage of the situations we faced during the year.

Key learnings from FY 20-21

Cover the RISK, It is a necessity: The uncertainties in this year has taught us the importance of taking proper health and life covers. Always cover yourself with adequate insurances for the unfortunate eventualities for yourself and your loved ones.

LIQUIDITY is very important: Money in hand or convertibility of your investment to cash is an important factor in the decision-making while planning for investments or emergency use. In all this panic, products like mutual funds stood out as a great investment product because we can get the money back in T+1 or T+3 days.

TECHNOLOGY makes a difference, benefit from it: The lockdown taught us that we can do lot many things without stepping out of our home. Seamless online transactions, mobile apps, UPI, digital payment platforms and video-conferencing which were sparingly used became a part of our routine life and yes it is easy, fast and cheap so use it for your benefits.

‘Wants’ are different from 'NEEDS’ Identify them: The year taught us that we can live without many things like eating outs/malls/movies etc. Buying many things on EMI can be financially destructive, we need to prioritise expenses while taking loans. We should identify between good and bad borrowing. Taking loan for needs like home or education could be fine but indulging in credit cards and personal loans for lifestyle “wants” can be disastrous.

Be calm in PANIC: The year showed that how the market overreacts and those who get panicked in that situation regret later. Investors who stopped their SIPs March’April-20 will always regret their decisions. A few very good months (For example Apr’20 to Feb’21) can dramatically change the past returns, we also learned how investors can benefit from the cost averaging and the power of compounding in the long run.

Understand the concept of ASSET ALLOCATION: FY-21 also taught us that asset allocation is important. In this year we saw of the equity market meltdown in March 2020 and a credit crisis in April end. It has taught us a very important lesson that don’t go overexcited in any asset class and never keep all your eggs in one basket whatever secure it may look like.

We CAN'T OUTSMART the Market so be with it: We saw sharp fall in equity market in March’20 when the COVID cases were just few and it rose continuously during the worse period of lockdown. It taught us not to try to time the market and should spend ‘time’ in the market to build wealth.

LEARN some basics:  Understanding the basics of finances is a necessity for everyone irrespective of their age, gender, or socio-economic background. Information is easily available and we need to make our self-aware with the basics. But remember everything can’t be answered online so when we need help in-person, there are professionals like your banker, financial advisor and broker who are equipped to provide with suitable solutions. Take their guidance.

Finally, this year has taught us a lot and we must be grateful for its teachings and treasure our learnings, because a year like this does not come often. And yes, it is not over yet, so Be careful, Stay invested, be disciplined and don't go by hearsays, before embarking on the investment journey seek qualified advice.

What should we learn from the Crisis?

We get panicked when we see that our whole life’s savings/investment reduces to half its value in a just a year. But yes this is also the reality and faced by many investors during 2008-09 crisis. The investors’ money reduced by almost 60% (assuming the money was invested in BSE Sensex) within January 2008 to March 2009 period.   It needs extra ordinary courage and patience to digest such kind of loss and remain invested. However those who continued for next two years they were back in profit  If we see the historical returns the market since has given approx. 10% average annual return if my holding period is more than five years. So what should we do where there is a bloodbath in the Dalal-Street and how to survive this kind of situations, lets us find it out.

  1.  The most important lesson we should learns from past crisis is that Stock Markets goes ups and down but will finally react to the underlying economic signals. It will recover back if the underlying economy grows. However the small retail investors typically buy when markets are high and sell when markets crash. We have seen it in 2008 crisis. The mantra is: Buy Right products and hold, don’t get into panic selling. Usually there is a sharp recovery after a crash which cannot be encashed by the immature investors except may be few experts and hence small investors are most likely to miss the recovery. Unless we are invested, we could not gain from the market recovery. The strategy should be holding a well-diversified portfolio (through diversified mutual funds) rather than just a few stocks.

  2.  The old saying “Never keep all the eggs in one basket” is always relevant especially in case of the investments.  In the past we have seen various themes like IT, Pharma, Infrastructure funds which have done exceptionally well for some time but also turned huge negative when the hype related to these sectors waned out. We need to diversify our assets in different asset class like equity, debt, gold, real estate etc., not just that within asset class also we need to diversify further like in case of equity we should spread our investments in Large, Mid & Small cap Diversified Funds, Sector funds have higher risk and should be limited to only a small portion of the total portfolio. Diversification is very important and while analysing the return part we should see the portfolio return rather than one particular class of the assets.

  3. Portfolio Rebalancing is another important thing need to be practiced in investments. Normally  when the market rises we get carried away with it and forget the prudence while increasing the allocation in that particular asset class, rebalancing has a purpose and should be practiced in a systematic way. First we should decide how much debt and equity we are comfortable with based on our risk appetite and financial goals.  Once it is decided it should be practiced and rebalancing should be done when one asset class goes up. For example if we have decided 50:50 as equity and debt and due to rise in equity market the portfolio moves to 65:35, in that situation we need to redeem the excess equity exposure and brought it back to originally decided allocation.  As we reach to our financial goals we should reduce exposure from high risk category to low risk category.  By rebalancing we also tend to book profits in between while reallocating the assets.

We have seen a very sharp growth in mutual fund investments in last two three years. These are those new investors who have not seen a long and deep market crash like in 2008-09. The points mentioned above are very important for those investor. If an investor has begun to invest just by looking at the past few years’ returns and don’t have a proper plan/strategy, he will panic and sell at the first whiff of a longer market crack. Panic selling and greed-based buying will costs much, not just money but also the trust in the markets. Hence it is always better to take proper guidance from an expert.