Basics of Investor Resilience

As Covid retracted at the end of 2021, the world emerged from the global outbreak of the pandemic. However, just when the Indian and global economies started bouncing back, the pace of recovery was disturbed when Russia invaded Ukraine in February 2022. As a result, all major countries began to experience price rise and increase in the cost of living (inflation) which destroyed their growth (no jobs, less or no profit from business). Such economic uncertainty and high inflation are testing investor resilience. There is a need for investor education, protection and financial literacy. Hence, IOSCO (International Organisation of Securities Commissions) celebrates World Investor Week (WIW) in October every year to help investors make informed decisions.

World Investor Week

The need for investor education and financial literacy has never been more critical than today. Particularly, financial education and investor protection play an important role in improving investor resilience and confidence. This year, one of the focuses of the sixth annual WIW is enhancing investor resilience in the current challenging environment. The other area of focus is innovations that are reshaping the marketplace, such as sustainable finance and crypto assets.

WIW - Key messages on investor resilience:

A smart investor creates adequate emergency funds, knows that all investments involve risks, understands the importance of diversification, especially with regard to protecting investments from losses due to unexpected events, plans and budgets to manage risk, reduces the impact of inflation, and avoids high-interest debt, concentrates on the inflationary impact on purchasing power and calculates investment performance by using real rates of return and does research prior to investing to protect against financial scams.

Wars or terrorist attacks significantly impact investors and investments. In such a scenario, firms delay investment decisions or recruit new employees, consumers do not buy big-ticket items (cars, homes) and financial investors postpone their decisions as they await more clarity.

Today, rising inflation is a global problem. In India, inflation increased to 7% in August 2022. On the other hand, the RBI recently raised its FY23 inflation forecast to 6.7%. In the coming months, the global inflation rate may rise to 8% according to Nomura, the global financial services group.

To be precise, inflation is the reason investors should continue to invest and build wealth to achieve life’s goals. Inflation is going to be a constant in everyone’s life for quite many years, especially in a fast-growing and developing economy such as India. In reality, in the present times, even developed countries are recording high inflation.

As inflation increases the prices of a company's products, boost its revenue and profit. It is beneficial for the company and its investors. Equity investment such as Mutual Fund (MF) helps investors create wealth over a long period and raise their buying capacity over time.

Simply put, investing is a way to make one’s money work. If invested smartly, the investment can beat inflation and increase in value; it is mainly due to the power of compounding, which is used to its fullest potential in mutual fund investments.

A mutual fund is a collection of investors’ money that is invested in stocks bonds etc. Ideally, MFs tend to give good returns to those who invest for the long term. It may be through the Systematic Investment Plan (SIP) or lump sum investments for a fixed term. While SIP allows investors to invest a small amount of money every month, lump sum investment requires a large sum of money to be invested. There is a wide range of mutual fund schemes available suitable to investor requirements.

Here are some further tactics that an investor can use to counter inflation:

Understand risks before making an investment:

Investors can read commentary from analysts, competitors, suppliers, customers and other investors. Also, ensure that enough liquidity (cash) exists elsewhere in the investment plan to meet potential needs.

Diversify your investments to dampen losses:

Generally, a diversified portfolio is considered a great hedge (like an investment in gold and other precious metals) in the face of volatility or unstable market conditions. Additionally, it can also shield against inflation. The more stocks one owns, the more he dilutes the risk posed by any single stock. Plus, mutual funds and ETFs are great tools for this purpose, as they help build a portfolio to limit volatility and market risk. Investors with short time horizons should also keep some of their assets in bonds, cash and money market accounts.

Plan and budget to tackle challenges like inflation:

Budget to track expenses, and short-and long-term financial plan to make adjustments. It could mean deferring a home improvement project, travel, or buying a car. Settling debt, or bargaining to bring it down, can ease the investor’s burden when higher prices take effect. Most importantly, make room in the budget for investing.

Enhance financial knowledge to understand markets:

Read books, follow a mentor, get expert advice, analyse the market, and gain knowledge on investment options like IPOs, know the basics of currency, fixed income securities and mutual funds.

Avoid high-interest loan products unless absolutely necessary:

Avoid taking more loans, pay bills in full and on-time, pay off high-interest debts first, reduce the number of credit cards and shop for the best interest rates when consolidating debts.