The year 2020 will never be forgotten – the year that tested our patience and resilience and gave us time to think not only about life but our finances as well. Some had their livelihood at risk, while some faced salary cuts and there were the lucky ones whose finances were not impacted by the pandemic.
How investors managed finances in 2020
-Many more investors were interested in managing money better and this was evident from the large number of participants in our sessions. That was a good sign. The advice to investors was to hold on their equity investments and reap the benefits of the year-end rally. The common question in these sessions was whether to continue investing in SIPs (systematic investment plans).
-Trend chasing continued in every asset class. First, it was gold, followed by equities (both domestic & international) and then bitcoin. Numerous investors started to accumulate gold when it crossed Rs 50,000 per 10 gm, driven by hearsay that gold will touch Rs 1 lakh for 10 gm by the year-end. Many wished to invest in bitcoin and investors are punting with stock investments including investing in international stocks directly (without realizing the additional tax compliance)
-Recency bias played in investor’s minds. Else they would not compare recent returns in stocks to long-term returns in mutual funds and want to move from mutual funds to direct stocks.
-Quick-fix solutions and fast returns were favored as always. No wonder IPOs saw huge interest from retail investors, mainly for listing gains. Buy now, pay later schemes and personal/instant loans provided borrowers with swift access to money. What they forgot is that these loans come with interest rates of over 20 percent a year.
-Investors took more risk to combat lower returns from fixed income investments. NCDs, hybrid instruments were some of the instruments chosen.
-The positive effect of COVID-19 was that more people bought health insurance and started considering this to be an essential expense. Capital guaranteed life insurance policies and pension plans were in vogue as investors wanted to tie their returns for the long term. However, the returns from these policies are only around 4 percent a year and that’s not a great inflation adjusted return to lock into.
-Investors continued to rely on friends, family and colleagues for financial advice. Gen Z and millennials also followed advice from bloggers, tik tok stars and you tubers. Clearly formal financial advice has a long way to go!
What can improve in 2021
The best and only way to manage money is through financial planning and asset allocation. Instead of chasing trends or trying to find stocks or investing for listing gains, work on a financial plan, with a financial planner. This will help you to be focused on what your financial life actually needs versus what you believe you need.
Along with a financial plan, investors need to read and keep themselves abreast of the developments in the financial world. Moneycontrol has a great personal finance section, which regularly covers all personal finance topics – investments, loans, insurance, taxes and estate planning.
Read the fine print carefully before transacting. While purchasing health covers, read the policy document (available on the insurance company’s website) to understand the exclusions and sub-limits in the policy. There is no point believing you have adequate health insurance cover if it comes with too many conditions or limitations. Similarly, with investment linked insurance, figure out the likely returns post expenses as most agents show standard illustrations, which show returns at 8 percent a year. While taking loans, first check the interest rate rather than the EMI.
Mass awareness on digital frauds is the need of the hour. Netflix had a show “jaamtara,” on the modus operandi of these frauds. Using social media, movies, shows and regular newspaper campaigns would help spread the message. Maybe having mandatory messages before show beginning on an OTT channel or in between TV shows can be considered.
The regulators need to come together and mandate clear communication on costs and risks of any product, whether is an insurance policy or loan or NCD. Currently, only mutual funds are transparent on expense ratios and have a riskometer.
The government can nudge investors to save for common financial goals with tax benefits for solution-oriented investments. Currently, National Pension System (NPS) has an additional tax benefit over Sec 80C. Giving tax savings for solution-oriented schemes from mutual funds would help investors save for children’s education and retirement in a low-cost product (as compared to a similar product from insurance firms). The government may look at restricting expenses in these schemes, as it has done in NPS.Be safe, physically and financially in 2021!