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Photo: iStock
Photo: iStock

Invest your surplus but provision for emergencies first

This is also a good time to review the asset allocation in view of your financial goals, and take corrective steps accordingly

The benchmark Nifty 50 fell by a huge 40% from its peak in January 2020 by 23 March. It has recovered a little since then but equity investors have suffered a tremendous blow. The last time a correction of this magnitude took place in 2008, but many investors have no memory of that event and are mentally unprepared to stomach the present correction. The temptation to cut one’s losses and run is overwhelming. However, according to financial advisers, this is precisely what you should not be doing.

“People who don’t have an urgent need for cash should continue their SIPs (systematic investment plans) and STPs (systematic transfer plans)," said Deepali Sen, founder, Srujan Financial Advisors. SIPs and STPs average out the purchase price by accumulating more MF units in a market correction such as the present one. Even those who have a lump sum should invest in a staggered manner as timing the market is risky, said Amol Joshi, founder, PlanRupee Investment Services.

Sen, however, added that in case of emergencies and issues like a job loss, you should withdraw from equity funds. But do so only after you’ve exhausted the money in your bank savings accounts or debt funds.

“In case investors have EPF balances (on 26 March, the finance minister allowed EPF subscribers to withdraw up to 75% of the EPF account balance or three months of salary, whichever is lower), I would recommend this rather than redeeming equity funds," said Prakash Praharaj, founder, Max Secure Financial Planners.

When it comes to choosing funds, financial advisers are bullish on multi-cap funds, which can freely move between market segments but, typically, invest 40-70% in large-cap companies. “After the correction, I am increasing clients’ equity allocation, particularly to multi-cap funds. Some of the relative attractiveness of mid- and small-cap funds has eroded now," said Joshi.

The Covid-19 shock and the consequent lockdown have dented growth prospects in the near future. However, in the long run, government stimulus and stepped-up medical responses are likely to bring back normalcy. The fears about economic growth have, in fact, made equity markets relatively cheap. A valuation tracker released by ICICI Prudential AMC which factors in metrics such as price-to-earnings, price-to-book and market-cap-to-GDP, hit a level of 72.6 on 23 March. This translates to an “aggressively invest" signal, which last appeared in 2008-09.

Investors who have a surplus, after meeting day-to-day expenses and providing for emergencies, should seize the opportunity, albeit cautiously, using staggered investments. This is also a good time to review the asset allocation in view of your financial goals, and take corrective steps accordingly.

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