In turbulent times, look for simple yet innovative solutions
Nov 17, 2022, 13:54 IST
Just as the global economy started emerging from the brutal impact of the Covid-19 pandemic, freshheadwinds have now put hurdles in the economic recovery path. The picture looks grim, with analysts expecting significant slowdown in growth in the near future. The World Economic Forum estimates global economic growth to come down to 3.2% in 2022 from 6% in 2021. It could slow down further to 2.7% in 2023.
While the slowdown is bound to impact India, our economy is expected fare better compared to other countries. According to the World Bank, Indian economy is projected to grow at 6.5% in the financial year 2022-23. Previously the forecast for FY23 was 7.5%.
These developments could pose big concerns for many investors. What are the reasons behind this slowdown? How should investors navigate these testing times? We take a closer look.
Understanding geo-political dynamics
Owing to the pandemic, most countries were forced to take drastic measures to support their populations. This spending by the governments when the economic activity was suppressed caused excess liquidity and hence inflation. The Russia-Ukraine conflict followed in early 2022, which led to global energy and foodgrain supply disruptions – further adding to the already high inflation, especially in developed economies of Europe and North America, leading to what is now being called ‘cost of living crisis’.
To control this inflation, central banks have been aggressively increasing interest rates. The US Federal Reserve, for example, increased its Federal Funds Rate for six consecutive times, including four hikes of 0.75%. In India, the Reserve Bank of India has increased the benchmark repo rate four times in 2022 so far.
The increase in interest rates means the cost of capital for businesses increases, and from a consumer point of view, making purchases on loans becomes expensive – leading to further slowdown in economic activity.
Going back to the basics
Periods of economic uncertainty can be a difficult time for investors to take a call on their investments. Bleak economic outlook could result in weak equity market performance, the fear of loss on the investments.
In such situations, it becomes crucial to stick to the basics of investments. Continuing to invest through Systematic Investment Plans (SIP) prevents you from losing out on the opportunities if the market suddenly leaps forward. If the market continues to correct, it only brings your average cost of investments to a lower level.
However, for this to be successful, you need to be clear about your financial goals. If you invest keeping your goals in sight, you can become more aware of how much risk you can take with your investments. You can take a higher amount of risk for long-term goals by investing predominantly in equities. For shorter-term goals, investing in low-risk, fixed income assets like debt mutual funds can be a better option.
The finer touches
Prudent investing also includes knowing when to withdraw your investments to suit your financial needs. For long-term goals, the withdrawals of investments need special planning because one cannot predict the economic situation after fifteen or twenty years. . Just like automating the process to invest via SIP helps, gradually liquidating investments can be a solution to getting a regular stream of income from your accumulated wealth. The latter can be achieved through Systematic Withdrawal Plan (SWP).
One of India’s leading mutual fund company, is offering a combined solution of SIP+SWP in an organised and pre-determined manner, through an offering called Freedom SIP. With this, you can invest for a certain time period in your chosen growth-oriented scheme through SIPs. One can then transfer the corpus generated to a lower risk debt or hybrid fund and then liquidate the same in a disciplined manner. Such an investment method can prevent one from taking emotional and erroneous decisions with their investments, while earning a regular income and the remainder of your corpus continues to earn returns.
Adopting such a simple yet innovative strategy can provide a solution to long-term investing needs. That being said, to remain financially prudent, it is vital to follow the golden rules of investment – doing your own research, and ensuring that investment decisions are aligned with one’s risk appetite and financial goals.
Disclaimer : This article is authored by Russell Aaron Dsouza, Founder, Smart Investments. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India.
Advertisement
While the slowdown is bound to impact India, our economy is expected fare better compared to other countries. According to the World Bank, Indian economy is projected to grow at 6.5% in the financial year 2022-23. Previously the forecast for FY23 was 7.5%.
These developments could pose big concerns for many investors. What are the reasons behind this slowdown? How should investors navigate these testing times? We take a closer look.
Understanding geo-political dynamics
Owing to the pandemic, most countries were forced to take drastic measures to support their populations. This spending by the governments when the economic activity was suppressed caused excess liquidity and hence inflation. The Russia-Ukraine conflict followed in early 2022, which led to global energy and foodgrain supply disruptions – further adding to the already high inflation, especially in developed economies of Europe and North America, leading to what is now being called ‘cost of living crisis’.
To control this inflation, central banks have been aggressively increasing interest rates. The US Federal Reserve, for example, increased its Federal Funds Rate for six consecutive times, including four hikes of 0.75%. In India, the Reserve Bank of India has increased the benchmark repo rate four times in 2022 so far.
Advertisement
The increase in interest rates means the cost of capital for businesses increases, and from a consumer point of view, making purchases on loans becomes expensive – leading to further slowdown in economic activity.
Going back to the basics
Periods of economic uncertainty can be a difficult time for investors to take a call on their investments. Bleak economic outlook could result in weak equity market performance, the fear of loss on the investments.
In such situations, it becomes crucial to stick to the basics of investments. Continuing to invest through Systematic Investment Plans (SIP) prevents you from losing out on the opportunities if the market suddenly leaps forward. If the market continues to correct, it only brings your average cost of investments to a lower level.
However, for this to be successful, you need to be clear about your financial goals. If you invest keeping your goals in sight, you can become more aware of how much risk you can take with your investments. You can take a higher amount of risk for long-term goals by investing predominantly in equities. For shorter-term goals, investing in low-risk, fixed income assets like debt mutual funds can be a better option.
The finer touches
Prudent investing also includes knowing when to withdraw your investments to suit your financial needs. For long-term goals, the withdrawals of investments need special planning because one cannot predict the economic situation after fifteen or twenty years. . Just like automating the process to invest via SIP helps, gradually liquidating investments can be a solution to getting a regular stream of income from your accumulated wealth. The latter can be achieved through Systematic Withdrawal Plan (SWP).
Advertisement
One of India’s leading mutual fund company, is offering a combined solution of SIP+SWP in an organised and pre-determined manner, through an offering called Freedom SIP. With this, you can invest for a certain time period in your chosen growth-oriented scheme through SIPs. One can then transfer the corpus generated to a lower risk debt or hybrid fund and then liquidate the same in a disciplined manner. Such an investment method can prevent one from taking emotional and erroneous decisions with their investments, while earning a regular income and the remainder of your corpus continues to earn returns.
Adopting such a simple yet innovative strategy can provide a solution to long-term investing needs. That being said, to remain financially prudent, it is vital to follow the golden rules of investment – doing your own research, and ensuring that investment decisions are aligned with one’s risk appetite and financial goals.
Disclaimer : This article is authored by Russell Aaron Dsouza, Founder, Smart Investments. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India.