BE AWARE OR BEWARE OF THE SILVER LINING

Interestingly, human minds tend to overlook silver linings when they are under the grip of fear and crisis.

Ongoing financial woes, as well as an unprecedented global crisis of the pandemic, have unsettled the investment climate across the globe, including India. The current situation is extremely fluid and it is still too early to provide a detailed, quantitative assessment of the COVID-19 impact. GDP in drowning, countless people are losing their jobs, migrant laborers are fleeing. On the other hand, vaccines for COVID19 is still looming. Every day the record of numbers of infected are multiplying. Moreover, the US-China relationship is in turmoil, including Hong Kong.

The impact of change in the investment climate was reflected in the asset allocation, as investors parked more funds in more secure spaces.

Financial experts say that the slashing of interest rates for small savings schemes for the April-June quarter was on expected lines due to the steep fall in interest rates brought about by the economic fallout. However, the fact remains that small savings schemes like the Public Provident Fund, National Savings Certificate, Post Office Time Deposits, etc. offer assured returns and capital safety, which often build the foundation of our investment strategies. Moreover, social security schemes like the Sukanya Samriddhi Yojana, Senior Citizens Savings Schemes, etc. involve a targeted and disciplined investment approach to achieve specific financial goals of high importance such as retirement or children’s education.

The government moves to lower interest rates has well pushed the individual investor to seek alternate avenues. Banking experts fear that the reduction of one to three-year fixed deposit (FD) rate from 6.9 to 5.5 percent and five-year fixed deposit rate from 7.7 to 6.7 percent will hit small savings. The pensioners, too, will be affected as the interest rate for senior citizens has been cut from 8.6 to 7.7 percent. The PPF interest rate of 7.1 percent, down from 7.9 percent, is the lowest in four decades, and the fixed and recurring deposit rates are the lowest since 1991. The differential on a 5-year bank and a small savings scheme deposit were almost to the extent of 2.0 percent, which will now drop to even less than 1.0 percent. Additionally, many banks starting with the State Bank of India has also reduced the savings account rates to around 3.5 percent from 4 percent. The small depositor who suddenly finds keeping his or her money in a FD or PPF less attractive, there is a fear that people may opt to put their money in some dubious schemes, including chit funds, in the hope of earning higher returns. Investors in PPF and Sukanya Samriddhi Yojana will see the impact immediately with the lower rates also applicable to accumulated balance in their account. PPF investors will fetch 7.1% compared to 7.9% earlier while those putting money in Sukanya Yojana will earn 7.6% compared to 8.4% earlier. In the news, it was reported on Friday that India's GDP has increased by 4.2% in 2019-20. Which is the lowest since the 2008 recession? In January-March alone, the growth rate stood at 3.1 percent which is the lowest of the last 40 quarters. 

Nevertheless, the Sensex rose 1815 points in the last three days of last week, the question here arises how market rose despite so many adversities.  

The gradual ease of Lockdown and the onset of financial activities may have acted as a catalyst. Investing in stocks and funds has increased due to lower interest rates in various small savings schemes including banks and post offices, with that in mind, there is a tendency to buy cheap shares. It would depend on how quickly the pandemic is brought under control and the policy choices which the governments took to support their economies. Once this pandemic is over with normalcy returning to business and economy, the stock market will start moving in a positive direction, and as witnessed in the past, recovery would be faster than expected. It is true about the market whether it is the correction or growth, both phases make equity or stock market interesting and worth taking exposures.

Many of those who prefer to take less risk than are now showing a tendency to move some of their savings to stocks or funds. But if you don't know about it well, it can be a problem. So before setting foot in this market, it is highly advisable that you do not jump into the market or do not try to catch the falling knife.