The year 2020 has been marked by the Coronavirus pandemic which has brought about some major changes in the economy and the financial markets as a whole. In this scenario many of your clients must be confused about choosing the right investment avenue for their investments. The stock market has almost halved and the interest rates on fixed-interest investment instruments have been lowered. Gold, on the other hand, has shown a steady increase ever since the pandemic hit the financial markets. In the first quarter of 2020 alone, gold prices increased by 6.2%. In the month of April, when India was reeling under the virus attack, bullion prices climbed higher. From 1st January 2020 till 17th April 2020, gold prices increased by 11.7% (Source: Kitco.com). Here is a chart showing the change in gold rates over a period of four months – January 1, 2020 to April 23, 2020 –
(Source: Fidar News)
Moreover, many financial experts believe that gold prices would increase further if the pandemic continues. Here is the prediction for gold prices based on previous growths –
Since gold is at an all-time high, is it the right saving avenue for your clients?
Gold holds a traditional value for many individuals as it is used for special occasions and festivities. Many individuals invest in gold to create assets and to leave behind a legacy. Reselling purchased gold is often discouraged gold is mainly held on to for future. Considering this sentiment, your clients might not consider gold purely for its investment value. Gold is, however, a safe investment avenue and your clients can consider investing a part of their financial portfolio in gold to hedge against inflation and market volatility. What about the rest of the portfolio then? Can the entire portfolio be allocated to gold?
Not exactly! A well-diversified portfolio is beneficial as it allows your clients to invest in different types of avenues. A diversified portfolio offers maximum returns at minimum risks. So, while your clients can invest in gold as a hedging tool, there are other avenues too which they must consider. These avenues include the following –
- Mutual funds
Since the stock market is in a bearish phase, the NAVs (Net Asset Values) of almost all equity mutual funds have been affected. The NAVs have reduced making it a good time for your clients to buy more units in a mutual fund scheme. Later on, as the pandemic crisis eases and the markets stabilise, the NAVs would rise. This rise would give your clients very good profits if they buy at reduced NAVs. Since mutual funds have a diversified portfolio, your clients’ risk would also be diversified. So, you can advise your clients to invest in mutual fund schemes with a long term perspective if they want good returns when the markets correct themselves. Moreover, an ongoing SIP (Systematic Investment Plan) should be continued since the SIP would average out the effective NAV at which the units are being purchased.
Thing to remember –equity mutual funds should be suggested to clients who have a healthy risk appetite. If your client is risk-averse or wants to avoid equity exposure at this time, debt mutual funds would be a better fit.
- Fixed deposits
Bank fixed deposits are another avenue which can be chosen if your clients are risk averse. Fixed deposits would give your clients fixed returns after a specific period of time. Moreover, if they choose 5-year fixed deposits, they can also claim deduction on investment under Section 80C up to INR 1.5 lakhs.
Thing to remember – fixed deposit interest earning would be taxable in the hands of your client if he/she is below 60 years of age. Educate your clients about the taxability of returns from the scheme.
Public Provident Fund, National Saving Certificate and Sukanya Smariddhi Yojana are other fixed –income investment schemes which your clients can consider if they are risk averse and do not want to face return related risks. These avenues give guaranteed returns and have a long term investment perspective.
Thing to remember – the interest rates on these investment schemes have been lowered from 1st April 2020. Inform your clients about the reduced interest rates.
Stocks are suitable for clients who are risk loving and are looking for potential high returns. However, investing in stock is quite risky and your clients should have the expertise to identify potentially good performing stocks.
Thing to remember – stock investing should be done with complete market understanding and expert understanding of different stocks. A wrong choice might cause your clients to lose considerably, especially now when the markets are highly volatile.
What should you advise?
Being a financial advisor to your clients, you should show your clients the right picture. Suggest suitable investment avenues based on the risk profile of your clients. Risk profiling is very important as it helps in matching the correct investment tool to the correct investor. So, assess the risk profile of your client and then suggest the suitable avenues. While gold is performing well, it cannot be used to plan the entire portfolio. So, help your clients plan a diversified financial portfolio which contains a good mix of mutual funds, fixed income investments and gold.