Covid Impact, Part I - To Personal Finance

- March 30, 2020

The rapid spread of the novel coronavirus (aka Covid-19) across 104 countries in the world has caused panic and fear in the lives of people like never before. Stock markets across the world have fallen by 30% within a very short span of 3 weeks. Combined with the fight for market share of oil, launched by Saudi against OPEC+, it is not too clear how much more the markets will fall from this point onwards.

On the one hand, while people are deeply distressed about the health & safety of their families, they are equally concerned about their job, investments and what the future beholds for them. Several questions arise in the minds of people - although we cannot address the health aspects, we shall try to address some of the key financial health issues here.

Questions from an investor - What should I do?

Qn1: Should I sell my stocks?

Markets have fallen by 30-35% already, primarily due to the exit of large institutional investors. If your investments are in good performing & well managed companies with low debt, they will recover over time. Selling now will only guarantee you a 35%+ loss.

So, NO, please do not sell good stocks, but if you hold poor quality companies (like YES bank), they could all be be washed away in this covid tsunami.

Qn2: Can I buy some stocks?

For those of you trying to bottom fish the market, one word of caution. Governments & people world over are still trying to get a grip of this community virus on their life & death. Only when an assessment of Covid’s impact to economies, businesses, trade & jobs become apparent (which might take another 1-2months), it would be rightly reflected in asset prices such as stocks and gold.

So, while some quality stocks have corrected 30%, no one can guarantee that they wont fall further by another 10 or 20%. If you believe that it is a right price for a quality stock, YES you may enter now, but please do not infuse a big lump-sum, try to cost average and buy at different low levels from now on.

Qn3: Should I stop my SIPs?

Your Equity Mutual Fund portfolio would be in RED, reflecting the fall in stock market. But, this is the best time for the mechanics of SIPs to work and boost your returns in the long term. If you stop your SIPs now, you are only depriving your portfolio of the much needed chance to buy cheap at these lower levels.

So, NO, please do not stop or sell your Equity mutual funds. You started these investments for a reason, more specifically for a GOAL, to educate your child or to save for your own retirement. Today a part of your EPF, NPS and that of your market-linked insurance schemes are all being invested in the market. And your EPF trustee, NPS manager and Insurance House are all not pulling out of the market – when you wont STOP contributing to these instruments, why stop your SIPs, think again!

What should YOU do? - From an Advisor

With a looming recession and jobs at stake, many businesses (airline, hotels, export-oriented business etc) will come under duress and there is every chance that some ill-managed ones will go bankrupt. Please take the below measures on your investments.

Go back and look at your asset allocation – most people have 60-70% of their assets in fixed income instruments like bank FD, Company FD, Bonds & Debt Mutual Funds.
Review the health of all those papers that you hold.
Redeem / foreclose any Company FD or Debt fund that is vulnerable to a cut in credit rating.
Take help from your advisor & ensure all your fixed income holdings are in high quality papers (majority AAA rated).
Get out of low quality FDs, bonds, NCDs and Debt funds.
Do not get hyper-excited about stocks – they may only be 10-30% of your asset allocation and hence do not merit your 100% attention.
Stocks can cause panic and what is worse is it could distract your attention away from the larger fixed income asset allocation that you hold – so pay attention ONLY in proportion to your asset allocation, nothing more.
In case you have a higher allocation to equities and find yourself in a sense of uneasiness with the current fall in stocks, it is time to REVIEW your risk profile with your financial advisor!

On the personal side, at this juncture, most people are prudent to cut down all unwanted expenses. However, for those who did not cultivate the habit of having an emergency fund, here is a crisis and in case of a job loss, your 6 month emergency fund is your only savior. Similarly, for those who do not have a health insurance, here is the day that makes you realize the importance of having a health cover for you and your dear ones.

Above all, for those with debt, the system will offer you with more loans - the most important thing is to resist taking on more debt. Do not be tempted to take on any personal loan or use that credit card if you do not have a genuine NEED and have the propensity to repay it. It is trying times for all, but with precautionary measures, as a human race, we shall come out of this crisis together and recover both our health and wealth!