A lot has happened in a span of a month. The spread of a viral infection has brought all of the largest economies in the world to a grinding halt. People are falling sick, losing jobs and leading a restricted life amidst a global lockdown in a bid to slow down the spread of a viral infection, the cure for which is yet unavailable.
What has also happened as a result of this is a complete standstill in economic activity which in turn has led to asset prices falling. Equity markets are not to be left behind and have fallen sharply since over the last month.
This fall in equity prices could be seen as an opportunity to begin your market-linked investing. Market linked investing basically means investing in securities which are listed on stock exchanges. This can be done directly or through mutual funds – both equity and fixed income. Investing in such securities can help you create long term wealth and also aid your need for regular income.
However, there are risks involved thus, before you commit, stop and ask yourself these three questions.
1. Why are you investing? While lower prices may be a good place to begin, investing itself is a personal experience and not a mass activity. What this means is that you have to define what you want to achieve by making an investment in equity assets. Ideally, equity investing is a long-term game. You have to remain invested for at least 7-10 years. While this aspect applies to all investors similarly, you must decide your preferred investment time horizon and the reason you are investing. You could have a goal of catering to your child’s higher education in ten years or perhaps creating wealth to buy your home after 15 years. Or your goal could simply be financial freedom and wealth creation. Whatever the goal, write it down, define it and only then you can begin.
2. Have you understood the risk? Market linked securities, whether you invest directly or through mutual funds, have a daily price. This daily price can move up and down and it’s applicable for both equity and fixed-income securities. This risk of change in daily price is called volatility. But there are other risks too for investing in equity and debt securities and mutual funds. You must first understand the risk involved in such investments, weigh it against the benefits and then try to assess your ability to manage these risks. For example, in equity markets, as we have seen in the recent correction, the value can fall very fast in times of external stress. Are you able to absorb a 40%-50% fall in value of your equity portfolio in the short term? Are you willing to remain patiently invested through such disastrous times for at least 10 years to see the value grow?
These are crucial questions which will define your risk-taking capacity and hence, your ability to gainfully invest in equity. It will also help you decide how much of your money you are comfortable investing in equity and how much you want to invest in fixed-income. In the latter too, there are varying degrees of risk, all fixed-income funds and securities don’t behave in the same manner. You first have to understand and assess the risk and then decide whether you want it in your portfolio or not.
3. Can you invest on a regular basis? Most salaried individuals will have a regular income thus, facilitating their ability to invest on a regular basis too. It is important to do so as it is very difficult to predict what can happen in equity markets in the near term, and unless you invest regularly you are likely to miss out on opportunities like sharp corrections to buy stocks at a low value. Investing regularly helps in neutralising the daily price changes over longer periods of time. Moreover, investing regularly ensures that you follow a strategy to build your savings corpus. Regular investments can help greatly in building your future wealth. If your income doesn’t permit you to invest regularly, then think of ways to overcome this problem. For example, set up a secondary stream from your lump-sum income which gets invested regularly. However, you do it, be sure to be prepared for regular investments in equity.
Starting out with your investment portfolio today is a brave step because of all the gloom and doom around us. But you needn’t feel afraid if you carefully mark out your goals and determine your risk profile. If this is not an exercise that you are confident in undertaking for yourself, don’t shy away from getting in touch with an advisor who can hold your hand through this first step you are about to take.
To start is the hardest step to take, but it is also the most important one today. Those who have saved and invested suitably are less anxious in the face of today’s crisis. Hence, you too must begin; no better time than now to take the plunge and get a step closer to financial freedom.