​Investment blunders to avoid like the plague

If you are reading this piece, congratulations! You survived a watershed year. Indeed, 2020 will be remembered as the year of Covid-19 – the pandemic that caused death and devastation –health and economic. Let’s learn from the fallout and strengthen our immune system in all aspects of life. In this article, we have detailed the ways to boost financial invulnerability.

Liquid corpus for quick bailout

Building an emergency corpus tops our list of immunity boosters. In a fragile business environment where job loss is part for the course, one should have at least six months of family expenses parked in liquid investments. Keeping in mind the scary inflation, one needs to look beyond traditional products which yield returns that is generally unable to beat the inflation. Liquid mutual funds are a better alternative with comparable liquidity (T=1) and generally with moderate-high risk. Since these funds are market-linked they are volatile vis-à-vis conventional products; hence, choose as per your risk-return profile.

Go digital

Last year digital transformation took on a whole new meaning, making remote working the new normal. And, it is all encompassing. There has been a massive increase in the use of the internet and technology to run businesses and services from homes. Even investing is just a click away. A whole gamut of transactions can be done from the convenience of one’s home and even save money in the process.

Benefits of technology

Investors can use the following technological applications to invest in avenues such as mutual funds.

• Online platforms
  

1. Mutual fund websites – Websites of mutual fund houses, which allow one to invest in their schemes
2. Online aggregators/third-party platforms – Portals of aggregators or third party service providers that allow one to invest in schemes of multiple mutual fund houses
3. MF association/R&T platforms – These are platforms launched by the Association of Mutual Funds in India (AMFI) and registrar and transfer (R&T) agents

• Mobile applications

Smartphones have encouraged the use of mobile applications. In this space, there are mobile applications of mutual fund companies and those created by third-party service providers including R&T


• Social media/messaging services

The growing recognition of popular social media/messaging services has led some mutual fund houses to use these for reaching out to investors and keeping them updated on their investments. ​​

Ignore market volatility, stick to your goals

Investor and author Benjamin Graham created Mr. Market as an allegory in his book ‘The Intelligent Investor’ to describe how an investor is governed by panic, euphoria, and apathy (on any given day). Mr Market cleverly illustrates the need for investors to make rational decisions.

Taking a leaf from this book, investors should stay unflappable by short-term volatility in the financial markets, and instead stick to their goal-based financial planning. Last year presented a classic case of short-term volatility: the domestic equity market represented by the S&P BSE Sensex plunged approx. 37%^ from December 31, 2019 to March 23, 2020, which probably caused even experienced investors to lose sleep. However, it is important that investors keep their calm, because in the long term equity markets tend to trend up.

Notwithstanding market volatility, the long-term trend is positive​

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^Source: BSE and CRISIL Research

* Compound annual growth rate (CAGR) returns are calculated for period between December 1990 and 2020

Likewise, it is important to not go overboard when the bulls rampage the markets. For instance, the market recovered from March 2020 to rise around 84%^ in the remaining nine months to close at approx 16% for the year.

Rather than trying to time the market (which is very difficult to be 100% accurate) it is vital to take informed decisions. Risk aversion and excessive risk-taking have downsides. Instead, investors should align their investment in equities to their risk appetite, goals, and overall asset allocation strategy, which will aid in prudent decision-making. Mapping equity investing to long-term goals will help investors spend more time in the market.

SIP it slow and steady

To avoid falling in the emotional trap of market movement, investors should opt for systematic investment plans (SIP) in equity funds over the long term. SIP instils discipline in the investment pattern of investors. Investors should continue to SIP by staying focused on their goals and not market levels, and allow rupee cost averaging to do its magic.

Derisk

Another important rule of successful financial planning is hedging risks. You can hedge risk of financial loss by buying adequate life and medical insurance. Buying life insurance protects your family from any financial calamity after your death, while medical insurance helps reduce cash flows from your hard-earned savings towards medical costs. As a rule of thumb, investors should buy term insurance 10 times their annual income. So, if the annual income is Rs 10 lakh then one should have life cover of at least Rs 1 crore. In case of Mediclaim, the insurance should be enough to suffice you and your family based on the structure of the family members (young, old, etc).

Summing up

Life is full of surprises and exigencies are bound to occur. To safeguard against major shocks, learn from last year and inculcate the habit of robust financial planning.

Disclaimer: Any comparison/data mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities, any financial product or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

An Investor Education and Awareness Initiative by SBI Mutual Fund

1. Investors should deal only with registered Mutual Funds, details of which can be verified on the SEBI website (https://www.sebi.gov.in) under ‘Intermediaries/Market Infrastructure Institutions’. ​​​
2. 2. Please refer to website of mutual funds for process for completing one-time KYC (Know Your Customer) including process for change in address, phone number, bank details etc.
3. Investors may lodge complaints on www.scores.gov.in against register​ed intermediaries if they are unsatisfied with their responses. SCORES facilitates you to lodge your complaint online with SEBI and subsequently view its status.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.