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Your Money, Your Behaviour

by Money Puzzle   ·  May 4, 2020   ·  

Your Money, Your Behaviour

by Money Puzzle   ·  May 4, 2020   ·  

Photo by Ekaterina Bolovtsova from Pexels

There has been so much turmoil in the financial services space since the start of March 2020. The spread of COVID 19 into Indian cities led to announcements of lockdowns beginning with metros and then across the country. Slowly businesses were shut down, albeit temporarily, but with no visibility on when things would reopen. This was not just limited to India, but rather it had already spread thick and thin throughout the rest of the world.

Consequentially equity markets in India and overseas – collapsed in mid-March, investors lost 30%-40% value in stocks and stock portfolios in a matter of 7-10 days. It was pandemonium. Come April, sentiments in equity improved somehow, but oil prices collapsed. That caused more chaos and a shift worldwide to the only universally acknowledged safe asset, gold. Gold prices are now at an all-time high – close to ₹50,000 for 10 gms in India.

Then in the second half of April came another big blow, this time it was the turn of debt funds. What we can call a veteran fund house in the Indian context and a relatively large-sized one, Franklin Templeton India, decided to wind up six of its debt funds leaving investors in a lurch.

It doesn’t matter whether you are new to investing or have held a portfolio of market-linked securities for many years, the events of the last two months are enough to rattle your existing assumptions about all asset classes. Despite the mayhem, there is still no clarity in sight. To be sure, clarity will only come with a solution to the spread of COVID 19; none of us in the non-scientific research or epidemiology space know when that will happen. Even those in the know can give an estimate of time till the spread of infection starts to get under control and as of now, those estimates range from 12 to 18 months as a best-case scenario.

Here’s the thing, even for someone like me who has been writing about and researching financial market investment products for many years, the events in the past two months have led to questioning and counter questioning of my assumptions and the results I have seen thus far.

If like me, you too are feeling a bit out of sorts and trying to figure out either where to begin or how to rebalance, then here is how I would approach it. I’ve tried to keep this simple and broken it up into parts so that you may read in detail what’s most relevant to you.

The control centre

Many years ago, a colleague introduced me to the concept of the control centre. Make a dot, draw a circle around it and then draw a bigger circle around the small one. The dot is you; the small circle is your behaviour and the big circle is what is external – beyond your control. You can control what’s in the small circle, what’s beyond that is really not in your control, so don’t lose sleep over it.

What lies in that outer circle is the COVID 19 infection spread, what lies in the inner circle is the precautions you take to protect yourself and your family against the virus. Similarly, what happens in asset markets on a daily basis is really beyond your control. What you can control is your choice of how much to invest in which asset, your product choices and how you react to what’s happening in the external circle.

Five fundas to control your investing behaviour

  1. Invest only in what you understand
  2. Ask about risk before you ask about return
  3. Identify why you are investing – set goals
  4. In times of market panic, breathe and do nothing
  5. In times of market frenzy, breathe and do nothing

Follow these simple guidelines and you will have a lower investment risk than your neighbour who relies solely on tips. However, before you plunge into investing, don’t forget to build a savings pile, and emergency store to dig into for rough times.

Be safe. Be invested.

Endnote: Since we are talking investing, here is a quick take on what investing in different assets looks like today. How each of them is behaving (with the exception of market-linked debt in some cases) is typical of what period of risk bring along. So, read Funda 4 again and then move ahead.

Equity assets

The sharp fall in equity values in March took down long term returns and even long-term systematic investment plan (SIP) returns for regular retail savers. What happens when the market corrects so sharply is that the accumulated SIP value at that moment is disturbed and gets pulled down. You have to wait it out and extend your time frame by another year.

If you continue investing through the downturn, you can get the advantage of these lower prices too. However, this benefit is not a very high percentage of your overall return if you already have been doing your SIPs for 5 or 10 years.

Lower equity prices are always a good place to begin your equity book. These are extraordinary times in the equity markets, but as history has shown, recoveries always happen, though never in the manner you expect them to. Market corrections are never predictable and recoveries follow, and this is why they are important.

Equity assets are meant for the long term, this is at least 7-10 years and longer the better. For your financial needs which will fall due before 7 years, allocate a bulk to debt not equity.

Debt investments

There has been a catastrophe in the debt mutual fund space too, leading many to withdraw and invest in fixed deposits and other assured return products. While there is nothing wrong with doing that, if you are just starting out with your investments then the more you invest in low interest, high tax, assured return deposits, the less you will have in value to show for it few years down the line.

Why? Because of a concept called inflation.

Allocation to debt securities will be either because you want your money to be stable and safe or because you want some regular income. If you are a millennial with a job, you don’t really need regular income from debt. If you are a millennial without a job, then everything should be in a safe and stable investment.

In this segment only focus on three types of debt funds – overnight funds, liquid funds and short-term income funds. Within these funds invest only in schemes which have the highest quality portfolios, which means you will have to settle for middling returns in the category.

You need debt funds to balance your portfolio and make more efficient returns as compared to bank fixed deposits. 

What about gold?

Gold prices have shot up as people rush to buy what is safe. Gold funds have delivered a staggering 50% return in the last one year. But, before that for two years, the yellow metal was more or less in a tight range. Even earlier in 2013, it fell 25% and then remained in a range and then fell again in 2016 by around 15%. If you invest in gold, you had to have known when to enter and when to exit.

There was a lot of risk building up in financial assets through 2019 and that should have been an indicator to active investors that gold would be a favoured asset in high risk times.

If you consider the change in value over a long period like 10 years, gold has really given around 9% return in Indian rupee terms. Ideally, in the long-run return from gold matches the long-term inflation in an economy.

Hence, keep some gold in your portfolio – in paper form rather than physical – don’t overdo it. Unless you can predict asset cycles with good clarity and in advance, don’t over-invest in any one asset. This current period of risk took us by surprise, but assets are behaving as they should. Safe havens like gold have shot up in value while risk assets are volatile.

Real estate – now what?

This is one asset which I can’t claim to understand very well and although for many years now the oversupply, regulatory changes and shift away from cash economy has weathered the chances of survival in real estate, it has kept chugging along. But what now?

COVID 19, brought with it a lot more than infection. People have lost jobs, investment returns are low and bonuses will be a no show. Real estate transactions are definitely likely to suffer in the mass affluent segment. The rich will probably be able to take advantage of this period and buy cheap.

What also prevents a recovery in the sector is the relatively high loan rates. Most mass affluent, be it for consumption or investing buy real estate on loans. These loan rates have remained at an 8%+ level despite low rates in the economy and low purchasing power of the people.

The overall situation in the real estate market is unlikely to change in a hurry. If you have the money and the wherewithal to look for deals, you can possibly get some good ones now. Definitely don’t venture into buying real estate on loan and don’t buy with money you need for anything; use only the surpluses you have. Then too returns will take at least another decade to come through.

Around 15 years ago in India, residential real estate prices began to rise and went up nearly 10 times in a matter of 5-6 years. Those excesses still exist in the market. Rents come much cheaper than loan repayments. Until this imbalance is corrected, real estate investing will remain fraught with risks.


  1. […] Let me know what you think. If you want to know more read about your CIRCLE OF CONTROL here. […]

  2. […] The last time we had discussed the idea of the circle of control; focus on the inner circle where you can control outcomes and don’t stress about the outer circle which consists of all external events that happen around us. The inner circle essentially is about our reactions and our behaviour, that is what we can control. […]

  3. […] the first blog, we spoke about your circle of control and in the second, we focused on how you can use your behaviour to impact outcomes favourably. In […]

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