How can proper financial planning help you during COVID-19?
- May 11, 2020
- Posted by: admin
- Category: Investment
As Warren Buffet once said, “If you don’t find a way to make money while you sleep, you will work until you die.” The stock market offers a perfect opportunity to create wealth for a secured future if you have a good risk appetite and analysis skills. There are multiple ways you can invest in the Stock market. SIPs and Mutual funds are amongst the hottest ones.
Proper financial planning with the help from a good advisor can help you achieve your long term goals, despite short-term corrections like COVID-19.
Recent Covid-19 pandemic has shaken the world economy at an unprecedented level. With the world stock markets dwindling at an unprecedented level due to a steep drop in demand, selling spree in stock markets is threatening the global economy. This is once in a lifetime black swan events without any textbook solutions; there is no doubt about that. Sensex plunged almost 38% from February highs. This crash wiped out investors’ billions within days. With the nation under a strict lockdown, economic activities are at an all-time low. We are staring at a nationwide recession undoubtedly. The question is, how can you survive this COVID-19 scare and get away with it.
During such uncertain times, wealth planners and fund advisors often face questions like “Should I withdraw my mutual funds?”, “Is it time to stop my SIPs?” “Should I stay invested?” There is no way to know what the future holds for the stock market under current circumstances. What you can do is make your financial planning and investments as much sound and safe as possible.
Let’s take a look at what can be done in this situation.
There is only one direction where the stock market ultimately moves upward.
The history of the Stock Market has taught us; ultimately, the stock market moves upward. There were times when stock markets had bloodbaths. Often, it felt like the end of the story. But, surprisingly enough, the Market bounced back. Whether it’s a 1992’s crash, 2006’s crash, 2008’s crash or 2016’s crash, Market has always emerged strong. A similar pattern will be observed during the current crash. There can be short-term setbacks, but ultimately the Market will move forward. The reason is simple; India is one of the largest and most thriving economies with a massive population of 1.3 billion. Such a vast market is able to revive its demand and prosperity on its own. So, taking a long-term perspective, this crash has provided a golden opportunity for those who are looking for wealth creation.
Currently, Market is volatile, so it can swing anywhere between highs and low. So if you have an excellent financial advisor, you should surely give a thought to invest in mutual funds for long-term gains. But be aware, these goals should be long-term.
Set a long term goal
Empires are not built in a day. So when you start investing through mutual funds and SIPs, you should prepare yourself to stay invested for long durations. Longer duration iron outs the fluctuation in your investment with the “Magic of Compounding”. Let’s say you are investing INR 1 lakh in a large-cap fund that gives CAGR of 9%, compounded semi-annually. You can accumulate the fund of 3,74,531 in fifteen years. Now, let’s see the magic, if you stayed invested for just five more years, the amount that you will accumulate would be 5,81,636! Almost 40% more fund in just five more years.
This clearly shows the importance of long-term investment.
How concerning is this correction?
Corrections erode investor’s wealth within days. So when corrections like the recent ones occur, people often take emotional decisions and start withdrawing their money invested in mutual funds to prevent further losses. Let me tell you that this is the worst decision you can ever take! As the history of the stock market suggests, corrections are short-lived. The bounce-back that follows makes a long run, benefitting those who make logical decisions.
No doubt situation is precarious, and it’s understandable that you are concerned with your investments. But, if you are still invested, then the damage is done. Chances of Market going down further are slim. So if you take an exit now, you will be throwing away your money, instead of gaining from the bounce-back that will follow. So, yes this correction might sound an alarm, but it’s normal in the stock market. The Boom and Bust cycle in the Market common and inevitable. There is nothing to fear.
Should I stop my SIPs right now?
Let’s understand the concept of SIPs first. The sole purpose of SIP is to beat market fluctuations through cost averaging. When the Market is down, you buy more units and can average out the high cost when the Market is booming. Past analysis of SIPs shows a clear picture. When the Market falls the best thing to do is to continue your existing SIPs and add some more to your portfolio. This approach can help you build considerable wealth in the longer run. Recent sell-off has bottomed out almost every mutual fund portfolio. So, if you have sufficient cash flow, you should consider starting new SIPs undoubtedly.
Here, quality is a major concern. Generally, Small caps and mid-caps outperform base indices and large caps. But when times are gloomy, large caps and balanced funds are the only viable options. If you already have such funds in your portfolio, you should continue with your investment. If you don’t, get them now! It’s now or never!
You might have read various articles from some “experts” stating “the situation is worse than 2008’s economic crisis”, “Global economy has come to a standstill” and what not!
What these “experts” lack is a fundamental understanding of the stock market. As the time elapses, Market tends to move upwards, and not vice-versa.
So if you are worried about your investments or planning to take a plunge, now is the time. Get in touch with our Financial Advisors that can help you devise a successful strategy related to investments.
Invest Karo, Khush Raho.