Surat (Gujarat) [India], July 29: The last one-and-a-half years have been a rollercoaster ride for stock markets. The market mayhem in February and March 2020 saw key indices such as Sensex and Nifty crashing nearly by 25% as the Covid-19 pandemic hit the Indian shores and the country went into a nationwide lockdown. Since then, the benchmark indices have not just recouped the losses but have more than doubled to zoom to record highs.
The stock surge has coincided with the Indian GDP contracting by an unprecedented 7.3% in the financial year 2020-21 due to the impact of the pandemic, putting market pundits at pains to explain the sharp divergence in the GDP graph and the stock market charts. My view of the same is simple when stocks deliver a minimum of 40-50% returns, investors don’t look at the GDP numbers. The truth be told, the Covid-19 blow notwithstanding, the long-term India growth story remains firmly intact, and this is why investors, both domestic and foreign, are bullish on Indian stock markets. India’s plan to become a $5 trillion economy may take a year or two longer than initially targeted because of the pandemic, but we will get there.
There are also other reasons that are fuelling the investor frenzy. A significant expansion of the investor pool, as the millions of new De-mat account openings since February last year shows, enhanced liquidity availability, strong performance by companies, and some excellent Initial Public Offerings (IPOs), have contributed to the stock surge. The declining trend in small savings rates, where the average savings rate of 5-7% barely exceeds the annual inflation rate, has also helped attract more investors to stocks.
While investors have made good money in the Bull Run, investors need to stick to the stock market basics. These include investing only surplus cash in stocks, not going beyond one’s means, ensuring a well-balanced and diversified portfolio comprising high-quality companies, and most importantly, booking timely profits/losses.
A well-diversified portfolio also means investors should spread their holdings across asset categories. Apart from equities, investors must invest a part of their savings in gold, bank deposits, bonds, Public Provident Fund (PPF), etc.
For investors who are not confident of investing directly in stocks independently, investments by way of Mutual Funds, where professional money managers chose stocks to invest in, are an excellent option. Investors can invest sums starting from Rs. Five hundred a month or even lower to start, what is known as Systematic Investment Plans (SIPs), in mutual funds. There is also an option of investing a lump-sum amount in a fund of one’s preference through mutual funds.
Simultaneously, while it is not directly related to investments, having adequate insurance cover, both life and non-life, are also an essential aspect of proper financial planning. A lot of people ask me why they need to insure themselves. My simple response to such people is, “You will not turn bankrupt if you buy insurance, but in the unfortunate event of something happening to you, your loved ones will be you don’t.”
Given how rapidly the world around us is changing, financial literacy will become even more necessary. I recommend everyone to become financially literate to ensure their financial wellbeing.
(Prateek Toshniwal is a Chartered Accountant and a Financial Planner)