The entire world, as you know, is in a damage-saving mode. When it comes to handling your clients’ hard-earned money your approach should be no different: Are you keeping track of investors’ portfolio during the on-going Coronavirus or COVID-19 global pandemic? Swing into action in the interest of their financial wellbeing.

It is possible that in these depressive times, where we (India and many other countries) have not been seen much success in the containment of the deadly Coronavirus and hence the lockdown has been extended, investors/clients may be feeling nervous and financially insecure.

It is expected of you as their financial advisor or financial guardian to pragmatically counsel clients and handle their hard-earned money with care and prudence as you would do with your own.

Just as doctors and paramedical personnel are proactively and proficiently doing their job to fight COVID-19 with utmost prudence and diligence, be a financial doctor to investors/clients. It would damage your client-relationship and business if you think, “I’ll address to investor/client concerns when COVID-19 pandemic is over”.

The fact is COVID-19 pandemic is far from over: the number of confirmed cases of COVID-19 and deaths are increasing by the day. And the markets too, as you know, have been panting for breath; volatility has intensified like never before.

Everyone — the Ministry of Finance and the Reserve Bank of India (RBI) — are taking measures to combat COVID-19 pandemic to provide relief. On your part as a financial guardian, handle investors/clients with empathy, care, diligence, and with ethics being the foundation stone. Be transparent, do research, and render proficient advice. Investors/clients look up to you for prudent counsel and handholding in the journey of wealth creation in these testing times.

For the past few days, markets have been rallying on the hope of containment of COVID-19 and economic stimulus from the government, over and above what’s already been announced. But it would be unwise to think that equity markets are out of the grip of bears. The fact is, bears are still running loose.

Table: Markets in a firm bear grip

Particulars S&P BSE SENSEX S&P BSE Mid-Cap S&P BSE Small-Cap
All-time high (Dates) 20-Jan-20 09-Jan-18 15-Jan-18
All-time high level (in points) 42,273.87 18,321.37 20,183.45
Level as of Jan 1, 2020 (in points) 41,306.02 14,998.63 13,786.69
Level as of April 20, 2020 (in points)  31,648.00  11,798.83  10,886.91
YTD Return (%) -23.4% -21.3% -21.0%
Correction since the all-time high (%) -25.1% -35.6% -46.1%

Data as on April 20, 2020
(Source: BSE, PersonalFN Research)

It is possible that, soon after the stimulus 2.0 is announced and the lockdown is withdrawn completely, many companies will be able to truly assess how bad they were hit by the pandemic. Further correction cannot be ruled and the bottom is unknown.

How to cope with that?

First and foremost, set realistic return expectations. If investors/clients are keeping lofty or unrealistic expectations, tone them down. Explain to them risk and return go hand-in-hand.

A fact is, after the sharp correction witnessed by the Indian equity market, the earlier double-digit long-term average compounded annualised returns over 10-15 years, have slipped into a single digit. We will, of course, bounce back, but the recovery is likely to be slower because in all probability COVID-19 will be followed with a financial crisis (as credit risk has amplified) and the risk of recession looms large.

Insist investors/clients follow a prudent asset allocation model and review it periodically. If they haven’t got it in place already, set their asset allocation right. Now that the equities have witnessed a sharp correction and volatility has intensified, reviewing, and resetting your asset allocation is warranted.

Use the Smart Asset Allocator online tool available on the Certified Financial Guardian website to review the investors’/clients’ asset allocation as per his/her risk profile and goal.

Under “asset allocation by risk profile”, you can determine a suitable asset allocation model taking into account the investors’/clients’…

  • Current age;
  • His/her annual income;
  • Existing assets & liabilities;
  • Monthly investible surplus;
  • Broader investment objective;
  • The investment time horizon; and
  • The degree of loss that can be endured. 

For “goal-based asset allocation” the following factors will be considered:

  • The type of goal being addressed;
  • Time to achieve the goal;
  • The amount needed to achieve the goal in today’s rupee terms, the inflation rate;
  • The lump-sum investments as of a date; and
  • The SIP investment per month is taken into account.

These factors will help you determine the expected rate of return to achieve the goal and value of investments as on the goal date.

While you help your clients draw an intelligent asset allocation model, please make sure they invest across asset classes that do not have a direct or positive correlation to each other.

Some of them might ask you why they can’t go all out on an asset class that looks attractive. As a responsible financial guardian, you must explain to them why one shouldn’t carry all eggs in one basket.

Basically, a healthy portfolio takes exposure to a variety of asset classes so that it does not become vulnerable when one asset class fails to perform.

Be patient with your clients until they understand the importance of asset allocation as the cornerstone of investing. Some of them might need more handholding than others.

Also, explain investors/clients a rule of thumb: ‘100 – current age’; before introducing advanced approaches of asset allocation. So, if your client is a 32-year-old person, his 32% of the investible surplus can be parked in debt and the remaining 68% in equity.

Remember, an intelligently crafted asset allocation will serve as an investment strategy in itself and draw in the following benefits:

  • Portfolio diversification
  • Minimises portfolio risk
  • Optimise portfolio returns
  • Align investments as per your risk profile and financial goals
  • Make timing the market irrelevant
  • And address your liquidity needs

A case study…

Suppose a family of three wants to travel to Australia five years from now, the goal-based plan would look like one mentioned below assuming that your client’s risk appetite is high.

Table 2: Case Facts

Amount (in Rs) required for a foreign trip for a family of three 5 lakh
Years left for the fulfilment of the goal 5
Amount (in Rs) required at a future date 6.4 lakh
Recommended asset allocation based on the risk appetite 70:30 (Equity:Debt)
Expected rate of return (blended)# 10.5%
Amount to be invested per month Rs 8,130

For illustration purpose only
#Blended rate is calculated by taking the weighted average rate of return of both the asset classes
Expected rate of return on equity 12% CAGR
Expected rate of return on debt 7% CAGR

Once you help your client understand how much he/she has to invest every month to attain his/her goal, then you can zero in on the instruments. You may suggest suitable funds. For investing in equity, SIPs (Systematic Investment Plans) in the best diversified equity mutual funds with a consistent performance track record would be the desired route.

As a responsible financial guardian, ensure that COVID-19 doesn’t leave your client in jeopardy. Thus review his/her allocation at pre-set intervals or at least once a year.

Happy Investing!

by PersonalFN Content & Research Team

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