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The Road to Recovery: How Smart, Sensible Investments Can Bring Your 2021 Finances Back on Track
The pandemic did more than attack our health—it hit our wallets too. But smart, sensible investments can bring personal finances back on track in 2021. Here's how.
2020 was a strange, unsettling year. The global economy began shutting down around February–March as the pandemic took hold. A year later, thousands are still dying every day from COVID-19. Tens of millions have lost livelihoods. Economic activity is nowhere near ‘business as usual’.
Economically, India was among the worst-affected countries. Quite apart from losing loved ones, many white-collar Indians lost jobs or suffered deep pay cuts. Many businesses have been pushed to the edge of bankruptcy, or beyond. It may be March 2022 before the economy recovers and grows back to the same size as it was in December 2019, before the pandemic hit. However, this doesn’t mean 2021 is all doom and gloom. The coming financial year—April 2021 to March 2022—is likely to see growth across many sectors, although this will be uneven.
This year is also bound to see a lot of political and social unrest, which would have inevitable negative consequences: the ranks of the unemployed have grown and that always contributes to political volatility. This is written well before the Budget so I’m sticking my neck out in the following predictions. By the time you read this, you’ll know the actual Budget. If the government is sensible—and this is a big ‘if’—it will not raise income taxes or corporate taxes. People need money in their pockets to fuel consumption and help a rebound. If the government is sensible, it will also try to announce big-ticket projects to generate employment. Of course, it must also roll out the world’s largest vaccine programme, which will, in itself, require huge funding.
So what can the sensible individual do on the financial front, apart from keeping fingers crossed and hoping the government is sensible?
Here’s the general strategy. Spread your savings across different assets. Put some into debt, invest some in equity while making sure you have enough insurance to cover emergencies and take care of your family. Also consider putting some savings into gold and maybe, if you like a gamble, consider cryptocurrencies.
Not putting your eggs in one basket is always sensible. It is especially important given current uncertainties. You don’t know what avenues of growth will perform and which ones will lag.
Let’s take a quick look at different investment channels.
There are many types of debt with different risks and returns. Bank fixed deposits are one default option. You can buy mutual funds dealing in different types of debt. There’s a counter-intuitive aspect to understanding how debt works. First, the stated interest rate is not the real return. The real return is the interest rate minus inflation. Second, if interest rates rise, any portfolio of existing debt loses value since that money is now earning comparatively lower return. Conversely, if interest rates fall, existing debt gains in value. So a rising rate is actually bad for investors in debt.
One shortcut to understand this: interest rates usually rise when inflation rises. If inflation rises, the value of money erodes. Inflation is likely to stay high through 2021. But the RBI is committed to keeping interest rates low because this will help a struggling economy grow. The government also needs to borrow vast amounts because of tax collection shortfalls. So, debt may not give great returns minus inflation. Nevertheless, holding a certain proportion of your savings in debt makes sense. Bank fixed deposits are safe but low return. Mutual funds that deal in treasury instruments (government debt) are also safe and low-return. Corporate debt (also via mutual funds) is higher risk but higher return.
Most mutual funds play the debt market—they second-guess trends in interest rates and buy and sell debt to try and exploit that. You can lose capital in a debt fund. So look carefully at track records, mandates and portfolio.
Real estate had a terrible 2020 with deals dropping sharply. There were also defaults on mortgages as households found finances stretched and there was little demand for commercial real estate for obvious reasons. Overall, the industry is in poor shape but this could be an opportunity—real estate prices are likely to stay low. Investigate prospective land purchases carefully because developers are finding it hard to complete projects and this is a big-ticket investment.
Precious metals (and diamonds, etc.,) are age-old hedges against inflation and uncertainty. Gold has done well all through last year. If you want to invest in precious metal, consider gold bonds, which actually offer interest. Silver is linked to industrial recovery and may also do better.
2020 has seen a terrific return from the stock market. This is a departure from the face of economic contraction. People have bought stocks directly and also invested via equity mutual funds. Both methods can fetch great returns. Both methods carry the risk of capital loss.
My advice would be, stick to mutual funds and commit to systematic investment plans for three years, or longer. That’s likely to fetch good returns. Don’t expect super returns from the stock market in 2021. The economy may recover but that recovery has already been anticipated by the stock market and priced in. This will be an uncertain year in many respects and the market is likely to respond with alarm. Geopolitical uncertainty is also possible: consider the implications of Brexit, a new US President, etc. You never know what could change—neither does the market.
Bitcoin, Ethereum and other exotics
Bitcoins, ethereum and other cryptocurrencies have zoomed in the pandemic. A lot of investors see these instruments as a sort of substitute for gold – in times of uncertainty, they could be a hedge to normal fiat currencies. So you may be tempted to buy these. But there are caveats: The regulatory situation is uncertain. Most nations including India are still wondering what to do about regulation. The upcoming Budget may bring some clarity.
It’s also normal for ‘cryptos’ to fluctuate 15 to 20 per cent in price in a single day. If you can handle the uncertainty and you don’t mind gambling, go ahead and make a small bet on bitcoin, or ethereum. A website like coinmarketcap.com offers good background data.
Happy investing and let’s hope we can put the horrors of the pandemic behind us in 2021!
Devangshu Datta is a financial researcher and columnist who writes on investment and personal finance.