Five Reasons Why You Must Change Your Saving And Investment Habits Post-Covid 

The current relative buoyancy in the stock markets should not lull investors into a false sense of confidence about how much of their savings they should invest in equity.

A few numbers will tell you why.

First, long-term stock returns have been falling after 2008, and this means the current buoyancy may not last. On Monday, 3 August, Mint newspaper published its 50 Best Funds Guide, and the five-year returns are shocking.

The 10-year returns on various categories of equity are unexciting. Five-year returns for large and multi-cap funds hover around 5.5 per cent or less. Ten-year returns are in the range of 9.05-9.74 per cent. Only mid-cap and small cap funds crossed double digits, and that too only over the 10-year horizon.

Now contrast this with debt fund (corporate bond) returns at 8.33 per cent and 8.61 per cent over five and 10 years. In short, over the five-year term, debt funds did better than core equity funds, and only over a decade did equity beat debt.

And remember, these are the best mutual funds. One worries about how the remaining funds performed. And how you would have fared if you had bought them when the market was at its peak rather than the trough over the last decade.

One lesson to learn is that you may have done better if you had invested consistently through systematic investment plans (SIPs), since that would at least have helped you average out your purchase price at lower levels than if you had bought at or near stock market peaks.

Second, liquidity is a bigger indicator of short-term market returns than just stock fundamentals. At a time when governments all over are keeping interest rates at near zero levels, the resultant liquidity surge is driving stock prices higher.

Once this accommodative stance eases – we can never know when this will happen, for Japan has had such policies for three decades, the US for a decade after 2008, and Europe for nearly as long – stock prices will adjust downwards. In one line, current stock prices are a function of too much money chasing stocks, not something related to intrinsic value in each stock.

The conclusion is that liquidity is vital for higher stock returns. So, keep a sharp eye out for interest rates, and central bank statements of liquidity boosting measures.

Bank fixed deposits, post office schemes (especially those for senior citizens), company deposits of high-quality promoters (Tatas, Bajaj, Aditya Birla Group, Mahindras), and the government’s new floating rate bonds (where interest rates are set every six months) are good bets for safety. These should be primarily be invested in with the aim of conserving capital.

A good way to conserve capital and still invest in equity is to use only the interest earned on these deposits and bonds to put into equity funds.

A point to remember: interest rates on 10-year US treasury is just over 0.5 per cent, and German bonds are in negative territory: they don’t even protect your capital. Indian 10-year government bonds fetch around 5.8 per cent – just enough to give you a positive yield after adjusting for long-term inflation averages.

But given the volatility of the stock and debt markets, you simply have to save more than you did in the past. Don’t depend on higher returns to boost your retirement nest egg, though you may sometimes be lucky.

Fourth, don’t forget gold. While equity has given underwhelming returns since 2008 (except for those who entered at the right time and sold off at or near the medium-term peaks), gold has given you 37 per cent in India (and 30 per cent in US dollar terms). The average annual return on gold since 2005 is currently at 14.7 per cent, much higher than equity even at its best.

To be sure, the current buoyancy in gold may vanish once normality returns on global trade and growth, but also remember this: over the long term, gold has retained a positive return over inflation. Gold must be a small part of everyone’s portfolio.

Fifth, forget real estate as an investment avenue. In India, realty is grossly overpriced and is a rigged market, and you should buy only if you can afford it, and intend to stay in the premises. Real estate prices will need another five to 10 years to adjust downwards to actual demand (by letting inflation reduce real prices), unless prices are drastically cut immediately by builders.

You can see this gap between real prices and rigged prices from the way builders quote prices for new launches, and what a similar house is available at in a similar locality. Usually, the latter will be at least 20-30 per cent cheaper.

So, if you want to buy, buy a home that is upto 10 years old from an owner whose credentials are known, or a broker you can trust. But don’t assume that you will make a killing after five years. Buy to stay in the property (or to host your office), and to give your family the assurance that they will always have a roof over their heads come what may.