Being Money-Wise In 2022: First, Save More, And Then Invest With Caution

Every year-end, investment gurus tell us where you should put your money in the following year. However, you don’t have to be an investment expert to know what you should do with your money, for that depends purely on your situation and your capacity for risk. So, the real thing to understand is what kind of risks we will face in 2022, and then make an informed guess about which asset will be safest or which one will deliver the most returns.

The asset classes normally considered are the following: stocks, bank deposits and debt instruments, mutual funds (which could be in equity, debt or both), gold, cryptocurrencies, and real estate. Esoteric investments like paintings or sculptures by upcoming artists or rare coins are usually not part of such advisories, for these are niche investment areas best left to super-specialists.

So, to begin with, what are the risk factors facing investors in 2022?

The first and most important risk is global instability. With Russia threatening Ukraine, China under Xi Jinping threatening everybody around the world, and with Pakistan and West Asia retaining their positions as top terror havens in the world, the biggest risks to equity and debt are geopolitical factors. Any kind of conflict that spills beyond any country’s borders can roil all markets, including equity, debt and realty. And if the west responds to aggression with sanctions, world trade will also come under threat.

The second risk, and an equally big one, is Omicron and how the pandemic will play out in 2022. Covid cases are spiking again in the US and Europe, and Asia and India will not be immune. Till we know how serious Omicron is as a killer, we can’t be sure how the markets will behave, since the virus will influence how soon or how slowly central banks and governments will tighten up monetary and fiscal policies.

The third risk is thus monetary and fiscal policy. Already, the world’s most important central bank, the US Fed, has indicated that 2022 may see three rate hikes. The Bank of England has already raised rates from pandemic-era lows, but the European Central Bank is less eager to raise rates. The actual trajectory of rates will depend on inflation trends and Covid’s progress or gradual withdrawal. In November, US retail inflation hit a 40-year high of 6.8 per cent, leaving India’s own 4.91 per cent in the dust. This suggests that overall rates will have to be rising rather than falling in 2022. When the US raises rates, other central banks cannot do something completely different, assuming they want to stabilise their currencies.

The fourth risk is domestic – largely related to India. One relates to politics, since many major elections are due in 2022, including the all-important state of Uttar Pradesh. But an equally important factor will be the behaviour of the equity market. With share prices already very high, the prospect of huge additional supplies of equity through large IPOs (initial public offerings) will impact secondary market valuations too. The post-listing underperformance of IPOs like Paytm and some other companies shows that the market’s appetite for long-gestation tech projects is not inexhaustible, even though it is holding for now.

According to a Mint report (28 December), IPOs garnered Rs 1.18 lakh crore in 2021 so far, and 2022 may see an encore. The report quotes Prithvi Haldea of Prime Database as saying that 32 companies have already received the regulator’s permission to raise Rs 47,000 crore in 2022, and another 33 have filed applications to raise another Rs 60,000 crore. And this does not include what the government itself will raise, especially from the Life Insurance Corporation IPO.

The supply of fresh equity will sag the markets unless business and investor optimism continues – which could again be impacted by geopolitics, monetary and fiscal policies, and Covid itself.

These uncertainties suggest that 2022 is a year of caution for investors. Given economic and job uncertainties, more than knowing where to invest, what you need to do is save more than you did in the past. This may not be good news for policy-makers, who want citizens to shed caution and start spending, but what is right for the macro-economy may not be right for you, unless you are rolling in money.

Here’s what one can reasonably expect with various asset classes:

Equity: Valuations may stay muted not only due to the already steep rise in 2021, but because the liquidity tap may tighten in 2022 and rates may rise. Rates and equity values are inversely related. However, some segments of the market may remain exceptions, including software services, pharma, logistics, fintech, etc.

For those who cannot afford an equity downslide, the best way to increase exposure to equity without betting the farm is this simple conservative technique: keep the bulk of your money in fixed deposits or debt, and invest only the interest earnings in equity through systematic investment plans. Ideally, even the provident fund should do the same: invest only the earnings in equity or exchange traded funds.

Debt: The debt markets will be rocky, for as interest rates rise, existing debt instruments will lose value in order to align yields with market rates. Those who want to escape this roller coaster should keep most of their money in bank and post office deposits; government bonds are safe only for those with a long-term investment horizon.

Real estate: My common sense understanding of real estate is simple. Middle class individuals should not see real estate as investment, but one that provides them the emotional security of owning the roof over one’s head. One can buy one house that one can reasonably finance or afford. Speculative investments in real estate are only for pros. Also remember, real estate is not easy to sell or buy, and transactional frictions are high. A significant chunk of your capital gain, if any, can be eaten up by related transaction costs like stamp duty or brokerage. Also, rental yields in most cities are far below bank FD rates.

Gold: Gold is the ultimate hedge against long-term inflation. In the last 15 years, rupee returns on gold have been negative only in three years, and the average annual increase is more than 12 per cent – higher than inflation. In fact, gold has delivered long-term positive returns in almost any currency that it is traded in (see the table at the bottom of this goldprice.org page). At a time of great geopolitical uncertainty, one should increase one’s holdings of gold or gold-based securities like sovereign gold bonds, which offer 2.5 per cent annual interest and also exemption from long-term capital gains. I am a great believer in sovereign gold bonds, but this year I would also recommend some holdings of physical gold in the form of jewellery or coins. Reason: when times are unsafe, having physical gold that can be instantly converted to cash is not a small advantage.

Cryptocurrencies: The world is not yet comfortable with cryptos, and Reserve Bank of India certainly wants them banned. At the very least, government will tax you on crypto’s capital gains. Its value has also been unusually volatile, with Bitcoin seeing its value in rupee fluctuate between a low of Rs 18 lakh to a high of over Rs 51 lakh in 2021 (see chart). Crypto looks more like a punt than an investment, and don’t blame anyone but yourself if the government comes down heavily on this form of asset and looks at your investments in cryptos with jaundiced eyes.

To repeat: 2022 is a year for higher saving not spending, for caution and not excess risk-taking. Spread your risks, and enter each market slowly and steadily. Lumpsum one-time investments in any asset may be problematic in a year when price volatility may be high.