A Covid-Era How-To For the Money-Wise

Booms and bull runs lead to “irrational exuberance”, a term coined by Alan Greenspan, former chairman of the US Federal Reserve, in 1996. More than a century before him, author Charles Mackay ­explained the phenomenon succinctly in his aptly titled book, Extraordinary Popular Delusions and the Madness of Crowds. He presciently wrote, “Every age has its peculiar folly...into which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.”

Panics and investment pandemics, in contrast, lead to another kind of herd mentality, a lunacy that too is irrational and dynamic. However, what drives it are the pain of loss, inevitability of volatility, and a desperate need to protect savings. Only in retrospect do investors realise the bitter truth in both cases. Economist Robert J. Shiller explained this about two decades ago when he wrote that the markets do not always ­reflect the “sum of the available ­economic information”.

What he implied was that the present prices of assets might give a distorted picture of the near future. During boom times, the high prices could suddenly fall. During crises, they could unexpectedly rebound. Since both the scenarios are unforeseen, the investors end up ­either taking the wrong decisions, or making costly blunders. This was ­evident when Outlook spoke to dozens of investors on how they acted and ­reacted during the COVID-19 crisis, i.e. in the past six months.

Before we delve into the insane behaviour, as also intelligent moves, of sensible and rational people, there is a need for a context. This is because the current crisis, in many ways, is unlike anything seen before. The virus struck in a bizarre manner ­—although it wasn’t as deadly as the others, it spread fast, and across vast geographies. Almost all the economies were paralysed, and billions were locked up in their homes. A credible cure is still several months away.

Global stock indices, as expected, went into a free fall. In India, the Sensex ­collapsed from over 42,000 points in March to below 26,000. Then came the miraculous recovery. Today, the index is around 38,000, or less than 10% below its previous high. To hedge bets, institutional and individual investors shifted to the age-old security of gold, and debt ­instruments. Gold prices zoomed, but the returns on the latter drooped as ­central banks slashed interest rates to aid and abet economic recoveries.

However, volatility remained. In August, the Sensex saw huge ups and downs on a daily basis. Umesh Mehta of Samco Securities says this may be ­because many stocks that comprise the index are back to their original levels, and people wish to book profits by selling them. Gold prices witnessed a topsy-­turvy trend. The World Gold Council (WGC) warned about “higher...volatility in the near term”. Mutual funds recovered, but there were wide differences between the various schemes.

In such uncertain periods, those who think they are smart and savvy, as well as strong-hearted and poised, tend to take risks, and actively seek opportunities. Consider the case of Sunil Kumar, a general manager in state-owned oil major, ONGC. Eight years ago, he sold his entire equity holding, and invested a portion in mutual funds. In April 2020, he returned and purchased a few ­marquee stocks at “attractive valuations”. Since the Sensex went up, he says, “The results are encouraging.”

The 54-year-old Asim Srivastav, a marketing-research professional, confidently claims that he wasn’t “fazed by the sharp drop in (equity) market”. In fact, he sold a part of his holdings in debt mutual funds, which invest in securities with fixed returns, and purchased shares of blue-chip companies. Within mutual funds, he shifted to those that invest in equities. As the stock prices and indices moved up, he explains that the “benefits of my actions are obvious”.

A couple, Sohil Mistry, a 33-year-old professional, and his wife, Riddhi Shah, a 32-year-old lawyer, opted for a different strategy to increase their overall ­returns. They broke the four fixed ­deposits they had, and shifted the entire corpus to debt funds and insurance plans. “The returns are higher, and the money is still safe in debt funds,” says Sohil. Adds Riddhi, “During the crisis, we realised that we had to get out of the deposits’ trap, and invest to secure a ­future financial cushion.”

Such urgency among the risk-takers to shift from debt or mutual funds to ­equity, and from low-return debt plans to high-return ones, is reflected in the market trends. Deepak Jasani, head ­(retail research), HDFC Securities, ­explains that investors have shifted their focus from the Sensex stocks to small- and mid-size ones, which constitute the small-caps and mid-caps. In the broader market, the bulls were on top as three shares advanced for every two that declined.

Mehta of Samco feels that buyers seem confident that “select mid- and small-caps... are undervalued and available at decent prices”. As the latter search for value, there is “selective buying in certain pockets” of the overall universe of stocks. Like Kumar and Srivastav, many think that hot, hitherto hidden, quality stocks are available at a bargain. This is an opportune time to lap them up before their prices rise. These investors hope to make a killing before the others step in.

This path to profits is laden with huge hazards. Until recently, only the Nifty and Sensex witnessed phenomenal comebacks. Among the 30 Sensex stocks, only seven—HRITHIK (HDFC, Reliance Industries, Infosys, TCS, HDFC Bank, ICICI and Kotak Mahindra)—accounted for the majority of the rise. This was largely due to net inflows by foreign investors, who pumped in $5.3 billion between April and July this year, and which was higher than $1.2 billion inflows in the same ­period in 2019.

At present, both institutions and a horde of retail investors are responsible for the action in the small- and mid-cap segments. The foreigners may become net sellers as their cash supply came from the additional money released into the monetary system by the global ­central banks. The latter may ease their efforts in the near future, and supplies may dry up fast. Given the recent ­volatility in stocks, there are chances of a sizeable correction (read: a steep fall) in the near future.

Hence, for those like Kumar and Srivastava, the looming question is whether they need to be, and whether they are, risk-averse or risk-takers. With a few years to retirement, their portfolios should include debt and sheltered options. If they opted out of equities, and chose the sanctity of mutual funds, they need to stick with the original plans. They cannot continue to churn their portfolios, and take additional stress and strain. They cannot time the markets. No one can.

If stocks spiral downwards—and it is a big if—the impact can engulf mutual funds. Those who shift from FDs to ­mutual funds may find that their urge to earn higher returns can result in a loss of the principal amounts. It is a fallacy to think that debt options are secure; they can be as risky as stocks when the market capsizes. When Sensex ­frighteningly dipped in March, those who held mutual funds had the scary ­experiences of watching their life-­savings wiped out within days.

Similar logic applies to investors, who seek the refuge of stability and more protection, and stick to mutual funds. During COVID-19, they too whipped up their portfolios. Vaibhav Shah, a 30-year-old finance professional, ­dec­ided on a tactical asset-allocation app­roach. He invested in debt funds, even as he stuck with equity. Within the former, he was less adventurous and ­focussed on those that invested in the best-quality corporate paper. “I stayed away from the riskier funds,” he says.

Paras Matalia, a 25-year-old chartered accountant, had a larger chunk of ­investments in shares, given his age and possible appetite for higher risks. However, the health pandemic forced him to sell a few equity positions at a profit, and switch to debt, including fixed deposits. “Debt securities are good to park your money for short-term ­periods,” he explains. Obviously, he feels that this is a temporary tactic, and hopes to increase his overall weight towards stocks in the near future.

Recent data shows a shift from equity-linked mutual funds to debt ones. According to the Association of Mutual Funds in India, this began in the first quarter (April-June) of 2020-21, and continued in July. The mindset of many investors changed from profits to protection. “During July, debt funds received substantial inflows. They were in categories with lower-­maturity products, and perceived to be safer,” explains Bekky Kuriakose, Head (Fixed Income), Principal Asset Management.

But such safeguards came with other problems. Ironically, Matalia understa­nds them. “Debt mutual funds are not risk free, and subject to sudden falls. Also, the yields (returns) on both debt instruments and fixed deposits came down at regular intervals as the RBI red­uced the interest rates. These may further slip,” he explains. Add to this higher inflation, and the real returns may be in the negative. Protective safeguards can lead to the principal's erosion.

One of the ways out is to buy funds that invest in high-return securities. But, as Avinash Samala, 24, who works for a ­private equity firm, says, “This may not be the wisest decision in the middle of a crisis.” The yields are unattractive, and one has no idea about the future of the companies in many sectors. He adds that even the banks are cagey to lend, alt­hough their business is to give loans. No business is better than higher bad loans.

However, an asset category sizzled and sparkled like nothing else. We are talking about the massive spurt in the prices of gold. In India, they jumped by over 25% from below `40,000 per 10 gm to more than `50,000 in the past eight months. Analysts predict it can touch `70,000, if interest rates stay low, the dollar feels the pressure, bullion is seen as a perfect hedge, and the retail herd continues to scamper for a safe haven.

Investors, who missed the gold gravy train, queued up for Gold ETFs (Exchange Traded Funds). ETFs, which are mutual funds in which each unit sold is backed by the exact quantity of gold bars, witnessed a net inflow of ­almost `4,500 crore between January and July 2020. Thanks to this frenzy, the global issuers of ETFs purchased 734 tonnes of gold ­between January and June this year, which was more than the 646 tonnes they bought in 2009, a year of the ­previous record inflows.

Surprisingly, many used the exaggerated gold prices to arrange for emergency money, which became imperative due to job losses and salary cuts. They sold or mortgaged their jewellery. Unfortunately, given the desperation in many families, the jewellers capitalised on the situation, and forced people to sell, and refused mortgages. Only the ­organised financial institutions that ­specialise in mortgage continued to do so. Sales of old and new jewellery peaked in the past few months.

Geeta, a house-help, sold a part of her gold savings in June when her husband lost his job, and the couple had to take care of four children. Her treasure was built on small pieces of jewellery she purchased every two years from her kitty savings. So did Asin (name changed), who was forced to sell off her grandmother’s ornaments, when a Delhi-based buyer refused to mortgage them. “I needed the cash. I am anyway not fond of gold,” she says.

V.K. Udayan, the owner of Udayan Anand Jewellery, which is located in Ernakulam (Kerala), claimed that he purchased 1 kg of gold a day in the past several months. “Only since August 13, has the figure dropped to 300-500 gm a day as prices saw a correction,” he adds. Sales were minimal during the lockdown, and picked up in the recent past. But in terms of volume, they were down by 40% from the pre-lockdown levels as consumers purchased lighter jewellery.

The case of gold is intriguing because prices catapulted despite the lack of ­demand. Not many bought the precious metal, except for the ETFs. “Investment in gold was hit hard between April and June this year. The demand in the January-June period was 70% less than the same period in the previous year,” says Debajit Saha, senior analyst, Refinity. Almost 90% of the sales of 24 tonnes during the period took place ­between January and March. So, why did the prices shoot up?

One of the reasons is that supply too vanished as most gold mines shut down. The only gold that came into the market was the recycled type, and only in ­meagre quantities. Hence, the demand-­supply mismatch became bigger. Speculation contributed to the jump in prices, as did the desire among institutions and individuals to purchase gold in paper form through bonds, ETFs and even e-gold. In all these instances, the sale of the paper instrument had to be backed by actual gold.

According to WGC, gold hasn’t reached its peak. In its recent report, it said, “However, we believe the COVID-19 pandemic may bring structural shifts to asset allocation, and that there are strong fundamental reasons supporting gold investment in the longer term.” The Indian festive-marriage season is around the corner, and demand may pick up over the next few months. The sluggish exports of jewellery may perk up too. Experts contend that the bullion market will continue to shine.

The downside is that the fortunes in gold have changed rapidly, and dramatically, in the recent past. According to www.goldprice.org, prices remained in the `33,000-36,000 band per 10 gm ­between September 2019 and February 2020. Even after they went heavenwards, there were regular dips. In March, the prices slipped by 10%, before they went up again. In the past couple of weeks, there is a renewed nervousness in the retail market. One cannot take the upsurge for granted.

Post Script: Joy (name changed) was caught in a dilemma. His `300,000 ­investment in mutual funds crashed by 66%, before it recovered. Shocked by the incident, he explored equities, a segment he had judiciously avoided for ­professional reasons. A chartered ­accountant and close friend told him that his company had discovered an ­algorithm to make guaranteed money in stocks. The CA assiduously avoided sharing the secret with others, but was willing to do so with his friend.

The company claimed it gave returns of 60-100% in six months. Joy was convinced, and decided to put in `50,000 to begin with. One cannot say for sure, but experienced investors can smell the whiff of a scam. Who has a secret like this, and shares it with others? Obviously, the returns will be fabulous in the first 12-18 months and, as Joy gets greedy and invests huge sums, he may lose his entire capital.

In the past, Noble Prize winners—­renowned mathematicians and physicists—claimed to construct foolproof algorithms. They lost billions of dollars, and went bankrupt. They took down other investors with them.