Your money vaccine for 2021

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The year 2020 was one of fear for our health, jobs and net worth. A small section of the Indian investors – those with the right exposure to equity and with a good blend of bonds and stocks – did well. The rest just looked on from the sidelines and wished they had the mindset to step away from the purchasing-power-depleting fixed deposits and other fixed-return financial products towards equity. Minus another global pandemic or something similar that we cannot blend into our predictions for the year, 2021 is being seen as the year that we recover our lives. But along with this recovery comes big change. We are told that the world has changed forever. That the dollar will lose its crown. That gold and Bitcoin will rule. That the stock market will collapse. It is frightening to hear these doomsday predictions and continue to think about our own financial futures with any confidence. As you hear these aggressive predictions, just do a quick search online to see that almost every year there has been a new reason for the financial world to end. The pandemic is just a larger and all-pervasive global event, but this too will pass.

Along with the Covid vaccine, you need to vaccinate yourself against reacting with fear or greed. While my money advice remains the old boring stuff of asset allocation, diversification and making your investing a matter of habit rather than a one-time decision, we must not bury our heads in the sand and look around for new information as it comes. 2021 will mean different things for different parts of our asset pie.

Fixed income. When central banks ease money supply by lowering the benchmark rate (the rate at which they lend to banks) or when they print money (as some of the hard currency countries are doing), there are fears of inflation and asset bubbles. Inflation is the result of too much money in the system that drives up prices – our rupee buys less and less. With low policy rates reflecting in a saving deposit rate of as low as 2.75% and FD rates of less than 6%. With inflation beginning to gather buoyancy, the post-tax return of the fixed-return investor will be negative. For the fully risk-averse investor in 2021, blending in some gold will be a good idea to build in some hedge against inflation. But do it only through the government sovereign gold bonds. Also remember, investing in corporate bonds that give a few percentage points higher return than bank FDs is actually far risker than having an equity exposure. Also, as an FD investor if you are thinking of unregulated investments including crypto currencies, you should really worry about your financial future.

Equity. Related to the easy money story are asset bubbles. Asset bubbles get formed when there is almost free money being given away by banks and these bubbles form across stock markets, real estate, alternate investments, art, wine – whatever the really wealthy funnel money into as they borrow at almost nothing and look for a quick short-term return. This makes for global headlines about rising and falling values of different asset classes making the average retail investor greedy or fearful. Equity investors in 2021 have just been through the rapids of 2020 and should be geared up for volatility. Having a good mix of broad market index, mid and small cap funds is your best path to getting an equity exposure to your long-term money. Find good funds and then stay with them till the data changes. Steady investors have done much better in 2020 than people who have tried to move in and out of the market. 2021 will be no different.

Real estate. For a decade the developers and brokers have been saying that this will be the year that real estate will revive hoping to draw investors in. But a mix of outright frauds, builder gouging and pure builder greed has taken investor interest out of real estate. An overall tightening of the system against black money too has worked to take the froth off. Real estate even today is a very long-term deal, the flip-and-double-in-a-year days are gone. Invest only if you see yields of at least 4% (annual rent divided by capital value of the property) and that too with cash down and not on a loan. Remember that Indian lending rates are nowhere near zero.

Gold. In times of global distress this metal does very well and so it has over 2020. Keep your exposure to gold between 5% and 10% of your net worth. Use the sovereign gold bonds to invest – you get an annual taxable interest (gold in other forms does not throw off rent, dividend or interest) and at maturity you get a free pass on the capital gains tax on these bonds. 

Bitcoin. The case for bitcoin and other crypto currencies is being made keeping in mind the devaluation of the dollar due to the huge flood of money that the Fed has been releasing over the years. The search for a store of value and a hedge against potential inflation is for real – fixed return investors need to think about this. But the answer for such risk-averse investors is surely not an unregulated ‘asset’. Doomsday prophets like to think of a world where they are the wealthy owners of Bitcoin where the rest of the world currencies are fully debased. Such doomsday schemes only work out in movies. This is not to say that none of the Bitcoin investors will make money, but for pure retail investors who hesitate to step even into index funds, this is not where you put your money. 

Each year will throw up a new winning asset class. By chasing last year’s winners, don’t wager your financial security. The era of uncertainty is here – steady money is your vaccine.

Monika writes on household finance, policy and regulation.