Corona virus – what to do with your portfolio now

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.

Warren Buffett

As I write this post, we are in the middle of a ‘Janata curfew’ – a voluntary lockdown in the entire country, initiated by Prime Minister Modi to impose social distancing on the entire population. That and washing hands frequently are the only two weapons we have against this global pandemic at the moment. This virus is unlike anything that humankind has ever seen before. It spreads so rapidly that it can overwhelm entire healthcare systems in a matter of days. We are seeing that scenario being played out right now in Italy and Spain. The ‘Janata curfew’ is therefore to be treated as a trial run to ensure that we do not get to that point as a nation.

However lockdowns have mega side effects, especially economic ones. The benchmark Nifty has already fallen 30% from the top in anticipation of a slowdown of the economy. If this pandemic does not appear to be coming under control anytime soon, the index could fall even further. PM Modi has also setup a task force under the leadership of the Finance minster to take stock of the situation and recommend appropriate stimulus actions. This is a good move unlike some other countries which have announced various kinds of bailout packages, which appear to be knee jerk reactions. We need considered measures to stimulate the economy at this time, not knee jerk announcements. So what will this task force recommend? Here are the possibilities in no particular order

• Doles – Daily wage laborers and contract workers who will lose their daily wages due to this slowdown may get some money credited directly into their bank accounts to help them sustain through these difficult times. Some states like Delhi and Karnataka have already announced the same.
• Interest moratorium – Public sector banks may be asked to give one or two month moratorium on interest payments for loans availed by their Customers. Private sector banks will have to match this in the interest of public sentiment.
• Deferred payments – Public sector insurance companies may be asked to defer policy premiums by one or two months without lapsing the policy. Private sector insurance companies will have to match this in the interest of public sentiment
• LTCG suspension – Long term capital gains tax on equities is at 10% whereas Short term capital gains tax is at 15%. The difference of 5% is not enough incentive for investors to stay invested. Hence LTCG on equities may be removed or suspended in order to encourage investors to stay invested and reduce the volatility in the capital markets
• STCG increase – Anticipating a bounce back rally in the near future which many traders will make money in the short term, the Government may increase STCG temporarily to benefit from this situation. The fact that the Government has not yet reduced prices on petrol and diesel despite international crude prices crashing makes this a real possibility.
• Increased spending – Government may announce increased spends in key infrastructure sectors such as highways, railways, ports, transportation, health, education and housing
• Interest rate cut – RBI may cut long term interest rates in order to make it cheaper for businesses to borrow capital and revive their growth
• Tax cut – Government may announce an income tax cut especially for the middle class in order to put more money into their hands.

What to Do?

1. All equity investors have taken a significant hit on their portfolio in the past few weeks. This is now a good time to review your portfolio and replace stocks which have fallen significantly with those that will benefit from the above stimulus announcements. Some educated guesswork is required no doubt in this process, but sectors like pharma, healthcare, consumer goods and chemicals are good choices at the moment. Making good picks from these sectors will help you recover your portfolio loss quickly when the bounce back happens. 
2. This is also a good time to review your asset allocation, which has become distorted due to the correction in the stock markets. Moving some part of your debt allocation to equities in order to restore your asset location is also a good idea at this time.
3. If you are invested in credit risk funds or corporate bond funds you need to be extra careful. The slowdown may turn into a recession if the pandemic continues for a few months which in turn may trigger defaults. Overnite funds and/or Gsec funds are the preferred debt instruments for now.

If you still have questions or doubts, reach out to your SEBI Registered Investment Adviser who will be guide you through this patch of global turbulence.

Do not mix Insurance with Investments

We are into the month of March – the last month of the current financial year. Tax planning is now uppermost on the mind of those who feel this is their last chance to save some income tax for the year. This urge to save taxes makes them highly gullible to the pointed sales pitch of ever available and savvy insurance agents who are on the prowl to ratchet up sales of their insurance products (endowment plans, savings plan, ULIPS, etc) in the guise of saving taxes for their clients. The lure is that most such insurance products are bundled as investments and promise to give back some multiple of the total premiums paid. Investors see a double benefit – tax savings plus money back at the end of the term. Consequently they are already sold and so quick to sign up for these products that their checks are already signed – they are just waiting to fill in the premium amount. This is how the vast majority of Indians are enticed into subscribing to sub-par investment products with hefty annual premiums for the meager purpose of saving a little tax. What they fail to realize is that by buying such products they neither get adequate insurance cover for themselves neither do they secure their future by way of making good investments. Lack of adequate regulatory prohibitions from bundling insurance products only makes it worse – ensuring this saga continues year after year.

The fact of the matter is this – Insurance does not equal Investments.

Let this message sink into your conscience through the above picture. Think of Insurance as an umbrella that protects you from unforeseen and sudden events. And think of Investments as an inverted umbrella that helps you accumulate and multiply your savings for a comfortable future. Do not ever mix the two – no matter how much the Insurance agent tries to convince you.

Insurance is a protection product and term cover is the purest and cheapest form of Insurance cover there is. That is the only form of Insurance you should consider buying – ideally for a sum assured of up to 10 times your annual income – to protect your dependents in the unforeseen event of any eventuality to your life. There is a cost that you have to pay for availing this protection - the annual premium. Think of this premium as an expense to protect your dependents if something were to happen to you. Do not be tempted by clever sales pitches that promise to recover this expense at the end of the term plus guaranteed additions plus reversionary bonus plus terminal bonus plus god knows what else. These sales pitches and the associated products are designed exactly to target your weak spot – your lack of willingness to treat Insurance premiums as an expense and your greed to recover this money at the end of the term. By succumbing to this greed you will end up owning products that neither gives adequate life coverage nor optimal investment returns. What makes it worse is that these are multi-year commitments which are often difficult to exit without talking a significant loss.

So the next time you are pressured by an insurance agent into buying such a product and are in doubt, ask for more time and then contact your financial advisor for a second opinion. Understand for yourself the tradeoffs between buying a bundled product versus buying a plain term plan and investing the rest of the money. Read The 4 ps of personal financial planning to understand how to go about planning your life’s finances in your own best interest.