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In 2020, the economy shrank, but markets zoomed. How must investors approach 2021?

Equity markets may have recovered from their lows. But that doesn’t mean all’s well. In 2021, invest sensibly. Don’t take unnecessary risks

December 22, 2020 / 11:05 AM IST

The year 2020 was a roller coaster ride for investors. The year began on a positive note but quickly turned grim as the spread of COVID-19 forced governments to enforce a stringent lockdown. The market as usual discounted in advance the impact the economy was likely to have in April to June quarter of 2020. Markets corrected sharply in March and recovered very smartly in subsequent quarters as the economic activity started limping back to normalcy. The economic indicators and earnings numbers for corporates looked significantly better-than-expected after August and we have seen a runaway rally. Well, the year so far could be summed up in these four lines, it clearly does not capture investor behaviour during these tumultuous nine months.

Fresh SIPs continued to get registered

The April to June quarter saw job losses and salary delays or cuts. Cashflows for the self-employed/professional were strained as the economy contracted sharply. A natural reaction to this was that systematic investment plans (SIP) were being paused or stopped. The monthly input value for SIPs dropped from Rs 8,641 crore to Rs.7302 crores in November. The impact of the market correction, cash flow issues at individual level and smart recovery of market led to continuous outflow from most of the equity categories. Fixed income side of the AMC business has seen transition as well. Credit crisis triggered by the ILFS default and exacerbated by the pandemic continued to impact various fixed income schemes that had exposure to credit. Credit mutual funds saw outflows. The investors moved to quality and demanded more transparency on their portfolios.

Also read: COVID-induced job loss | Money matters to sail through all contingencies

During these months, not all was lost. The new SIP registrations outpaced cancellations. Around 79 lakh fresh SIPs got registered from April to Nov. The run rate of new registrations is broadly same as last year. The other segment that found favour with investors was the Fund of Fund (Offshore) category. I do hope that investors are driven by the core proposition of offshore investing i.e., the opportunity to participate in themes and stocks that are not present on Indian bourses, diversification of portfolio and are not being driven by returns alone.

Also read: Why has there been a 3-fold increase in the number of investors flocking to international funds


Selling of mutual funds goes deeper online

Adoption of digital by advisors, distributors and investors was on the rise over past few years. The trend accelerated due to the lock down and as all segments realised the convenience of adopting digital. I would expect the trend will evolve into an exciting era where just from executing transactions, capabilities will be developed to deliver customised solutions. SEBI also came in with the RIA/MFD guidelines. I would expect the faster adoption of solutions category by the distributors. Today we are seeing increased acceptance of balanced advantage funds as a category. My belief is that facilities like Dynamic Advantage Asset Allocation Facility, Age-Linked Investments where asset allocation is determined by your age will see increased traction as the industry scales up the game from transactions to solutions.

What’s in store for investors in 2021?

Going into 2021, there are quite a few positives for both the economy and the market. Central banks world over have recognised the blow delivered by the COVID to the real economy and especially to the small and medium sized businesses. They have not only pumped in huge liquidity but also have also promised to keep rates low for the foreseeable future. This is pump priming the demand for risk assets and emerging markets like India are likely to witness further flows from global investors.

Vaccines are receiving approvals and soon the vaccines will be administered to the vulnerable segments first. It is likely to bring normalcy to businesses from tourism, hotels, theatre sectors that depend on face to face interaction. Indian economy will be operating on lower base and hence will see positive numbers for quarters ahead.  In some segments work-from-home will be a permanent feature bringing in huge pool of talent into the workforce. Women who have taken sabbatical for family responsibilities, persons who have moved to native places for family reasons will find opportunities. Some scars of COVID will remain, and probably manifest in the form of people opting for personal mobility and not shared services.

So is everything looking good on the economic front? No. there are challenges. Smaller units have gone out of business disrupting supplies. In some cases entire supply chains have got dismantled. This could trigger inflation forcing the central banks to revisit their stance. Geo-political risks remain in the background and so are the challenges from rising inequality.

What should investors do in 2021?

Talk to your financial advisor. Do not take any knee-jerk reaction to their investments.

Take this time to re-organize if you must, but with a clear sequence of priorities that the pandemic has brought out front and centre. Protection requirements, emergency fund requirements have to be built or strengthened first. Re-assessing your asset allocation in line with your financial goals comes next. Your retirement should be a priority since that is the only financial goal for which you do not get a conventional loan. At the very least, committing to spend less than you earn, saving the difference, investing that in a diversified portfolio with the help of a trusted financial consultant and having patience and discipline are four simple steps to commit to for not just 2021 but for years to come.
Ajit Menon is the CEO of PGIM India Mutual Fund
first published: Dec 22, 2020 11:05 am

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