9 money moves to improve your finances & end up richer in 2020

Both the economy and the financial markets were on shaky ground in 2019. Equity market was volatile, debt investors were a nervous lot and economic numbers did not instill confidence. As we bid goodbye to 2019, here are nine strategies that can help improve your finances in 2020. Follow them to become richer in the New Year. 1. Hike exposure to the mid-cap segmentExperts believe the Nifty Next 50 stocks will lead the next leg of the rally on Dalal Street.If you look at frontline indices such as the Sensex and the Nifty, you get the feeling that the stock markets are doing exceptionally well. The 15% rise in the Sensex in the past one year, despite the economic woes, is truly remarkable. However, these indices have been pushed up by just 5-6 stocks while the broader market is still in the doldrums. The BSE Midcap and Smallcap indices have lost 4.13% and 8.65% respectively during the past one year. Since this kind of narrow rally can’t be sustained for long, experts are advising investors to shift a part of their portfolio from large caps to the next level. “Given the outperformance in the large-cap segment, it is time to shift some money to mid-caps,” says S Krishnakumar, CIO – Equities, Sundaram Mutual Fund.Mid-caps have commanded a higher premium than large-cap stocks in the past five years. During this period, the Nifty-Next 50 ratio averaged 2.56. In other words, the Next 50 level was on average 2.56 times the Nifty level in the past five years. But during 2019, mid-cap anastocks faced rough weather and this ratio slipped to 2.27 in June. It now stands at 2.32. The valuation premium of the mid cap segment has also come down. The BSE 150 Midcap Index PE is now placed at 29.26, only slightly higher than the Sensex PE of 28.36. Experts believe mid-caps will bounce back and are therefore advising a higher allocation to these segments.Midcap stocks took a beating in 2019The Nifty-Next 50 ratio came down sharply during the year. 73005283 However, they also want investors to be selective. “While select mid-caps will do well, a broad market rally is still some time away,” says A.K. Sridhar, Director & CIO, IndiaFirst Life Insurance.The small-cap segment also saw a steep fall in the valuation, but analysts are not so bullish about this segment. “Broader markets rally when the economy does well. Since the economy is in a bad shape, stick to quality stocks,” says Gajendra Kothari, MD & CEO, Etica Wealth Advisors.2. Pare expectations of returnsEquities may deliver moderate returns in the coming years.Returns from equity investments have sobered over the past few years and are likely to remain modest in the coming years as well. This is true whether you are investing through SIPs or lump sum. The SIP is not some magic pill that can deliver under any market condition. It is simply a tool that allows investors to put savings on autopilot and invest in the equity market in a disciplined manner. It doesn’t let market volatility deter from savings habit. This lets you ride out the market upheavals and can fetch healthy returns over time.However, if you have started a long term SIP a few years back expecting to earn 15-18% annualised return, you are likely to be disappointed. When the market return itself has moderated to low double digits, equity funds cannot be expected to deliver much higher. With returns expected to remain soft, investors also need to recalibrate their savings for long term financial goals. Cut expectations, increase investmentsReturns are likely to moderate, so investors should hike SIPs to reach goals 73005291 If you continue with the same quantum of savings towards your goals, chances are that you will face a shortfall when you reach the target date. If your target is to amass Rs 25 lakh in 10 years and have assumed 15% returns, the SIP required is Rs 9,084. But if returns fall to 12%, the SIP should be hiked by 20% to Rs 10,868 (see table). Vidya Bala, Co-founder, Primeinvestor.in, argues, “It is prudent to revisit return expectations once in a few years. Adjust savings rate accordingly to counter any likely shortfall.”Experts suggest setting baseline expectations from equities on par with the nominal GDP growth rate (real GDP plus inflation rate).3. Start using a portfolio trackerDo you know how your funds did in 2019? Or how much returns have you earned in the past three years? Are all the funds in your portfolio performing well, or do you need to get rid of some? Not many investors will be able to answer because they wouldn’t have ever taken a holistic view of their portfolio, leave alone analysing it.The new portfolio tracker from Value Research does all this and more. It is a must have for any mutual fund investor and could change the way you look at your investments. It not only tracks your investments, but also guides you on the steps needed to improve returns. If your portfolio has some unsuitable funds (read underperformers), it will point them out and give reasons why those funds should be junked. If your asset allocation needs fixing, it will explain why. Want to redeem some funds but not sure if you will be slapped with an exit load? The tracker tells you exactly how many units can be redeemed without an exit load.Investors will particularly like the tax section, where the investor gets to know the capital gains he has earned in each financial year. That’s not all. The capital gains from debt and hybrid funds are indexed to inflation so you don’t have to do any complex calculation when filing your tax returns. “The portfolio tracker has been designed to empower the individual with information about his investments. It’s an analyst, advisor and chartered accountant rolled into one,” says Dhirendra Kumar, CEO, Value Research.Many individuals may have lost track of the investments done in the past and won’t even know if they still exist. For such investors, the portfolio tracker is a godsend. All one needs to do is upload the mutual fund statement from CAMS or other agencies and the tracker automatically registers the entire portfolio since inception. All funds linked to the PAN number get included in the portfolio, so even if you forget an investment, it shows up in the portfolio.Similarly, investors can upload their NPS statements and include fixed income (PPF, bank deposits, bonds) in the portfolio.4. Check biases during market volatilityAvoid knee-jerk reactions, stick to asset allocation.Despite the frequency with which the markets vacillate, investors react with the same volatility: buoyed by bulls, balking in the face of bears. This mix of emotions— panic, fear, hope, confidence, greed, denial—is triggered by behavioural biases that lead to wrong investing decisions.How investors are controlled by biases during a market cycle 73005301 However, these biases can be avoided if you know how they control you, and can be beaten by focusing on asset allocation instead of reacting in a knee-jerk manner. The idea is to avoid short-term noises and focus on long-term investments and goals. If you are incapable of emotional discipline, it is a good idea to hire a financial planner who can take a decision on your behalf. “If you analyse risks and rewards before investing in any asset class, then short-term volatility will not bother you,” says Financial Planner Pankaaj Maalde. “But if you invest by considering the past returns, then there is reason to worry. So map each investment to a goal as per the time horizon and invest according to asset allocation,” he adds.Some of the biases that come into play during a market flux include the Recency Bias, when the most recent events remain fresh in your mind and affect your investing decision. For instance, right after a bear market, you may feel too scared to start investing, believing that the dip will continue forever. At the other extreme is the Overconfidence Bias, which makes you believe you can never go wrong during a bull run. You continue to invest, ignoring the signs of a start of a down cycle.Another common bias is Loss Aversion, wherein you refuse to part with your loss-making investments during a falling market because you feel the pain of loss more acutely than the joy of gains. If panic sets in and people start selling recklessly, you could suffer from the Bandwagon Effect or Herd Mentality, where you simply follow what others do blindly. Confirmation Bias comes into play when you give more importance to the news that confirms your views even though the market is clearly giving the opposite signals. Another bias that affects your investments is the Regret Avoidance Bias, wherein you sell winners too early or losers too late in a bid to avoid regret over a wrong decision.5. Review debt fund portfolioGet out of schemes and fund houses with dubious holdingsThe year 2019 was painful for many debt fund investors. Rating downgrades or defaults took a chunk out of the value of debt schemes with exposure to lower quality instruments. Fund houses have been caught on the wrong foot too often. They are now getting wiser and growing more conscious of risks, but investors need to watch out for themselves. In 2020, monitor the portfolio of your debt fund more closely. Avoid debt funds that take high exposure to instruments issued by a single entity. This increases the risk profile of the fund. Also watch out for sharp drop in the corpus of a scheme within a short time. When a scheme faces large redemptions, exposure to existing instruments of lower quality gets amplified, resulting in higher concentration of low quality in the portfolio. Downgrades, defaults hit debt funds in 2019The NAVs of several debt funds tanked sharply after the credit events. 73005316 Data as on 23 Dec 2019 Source: Ace MFBe wary of funds that take high exposure to lower rated bonds in the quest for higher returns. While low rated bonds fetch higher yields, boosting a fund’s returns, these carry high potential of default, enhancing the risk profile of the fund. In short duration categories of debt funds particularly, investors should shun low credit quality. When investing for short term goals, investors should seek higher degree of safety. Any sharp drops in fund NAV owing to credit events will hurt more as the time frame for recovering lost value is too short. In the past year, many short-term debt funds were found to have parked a substantial portion of their corpus in sub-AA rated instruments to bolster returns. Experts insist that investors should stop chasing higher yields in bond funds. Ankur Maheshwari, CEO, Wealth Management, Equirus Capital, asserts, “Debt funds are meant to provide safety and not multiply wealth. Investors should stick to funds with high quality assets, preferably holding at least 80% in AAA or equivalent rated securities,” he adds.6. Put at least 5% of portfolio in goldThe trade friction between US and China, interest rate cuts and quantitative easing by global central bankers combined to push up gold prices by 22% during 2019. However, gold prices corrected recently due to the thaw in trade ties between the US and China.Experts say investors should not abandon gold in 2020. Though the US-China trade deals are moving in the right direction, a lot needs to be ironed out. “What we are seeing now is just the first round (around 10-15% of the work) and the remaining 85-90% of the work is still pending,” says Praveen Singh, AVP, Fundamental Research – Commodities & Currencies, Sharekhan Comtrade.After years of stagnation, gold shot up 22% in 2019The US-China trade war boosted gold prices. 73005321 Moreover, other fundamental factor supporting gold (interest rate cuts and quantitative easing) will continue in 2020 as well. “Though the trade deal related hopes may keep gold prices under pressure in the coming weeks, it is expected to recover after a short correction of around $50 from current levels. Gold prices may reach $1,700 in 2020,” says Singh. To benefit from this expected up move, invest at least 5% of the portfolio in gold. At the same time, don’t go overboard on the metal because the rally may not be repeated in 2020.7. Resist the temptation to invest in propertyThe problems facing the sector are not yet over so prices may not rise in the near term.The negative impact of the NBFC crises continued in 2019 as well, and the real estate sector was the worst hit. In addition to the dwindling domestic consumption and investment appetite towards real estate, the global slowdown has also impacted this sector badly. “During this crisis, multiple developers fell off the grid while several others are struggling to stay viable,” says Anuj Puri, Chairman – Anarock Property Consultants.The government got into a firefighting mode and implemented several measures, raising hopes for 2020. These measures include a 135 bps reduction in the repo rate, asking banks to link housing loans to external benchmarks and the creation of an alternative investment fund of `25,000 crore for last-mile funding of stalled housing projects. “The seeds sown in 2019 are expected to bear visible fruit in 2020,” claims Puri.Property prices barely moved in 2019Most cities saw prices rise by less than 1% during the year. 73005332 Source: Anarock ResearchSince the housing segment is a buyers’ market now, this may be a good time to buy a house for your own use. However, the time is not yet ripe to invest in real estate. “Real estate as an investment makes sense only when the prices are expected to go up or the rental yield is high. Since both conditions are not satisfying now, it is better to park the money in other investment options,” says Kunal Bajaj, Head of Wealth Management, MobiKwik.Experts believe the real estate sector may not bounce back soon. “Unlike other asset classes, bull and bear phases are longer in real estate because of the impact of capital gain tax benefit provided under Section 54 of the Income Tax Act,” says Feroze Azeez, Deputy CEO, Anand Rathi Wealth Services.When people make profits in real estate, they buy back some other real estate using sale proceeds to avail of the tax benefit under Section 54. Since the real estate market is in doldrums for the past 4-5 years, there is no price appreciation. However, the indexed costs keep on going up due to inflation and therefore, most people are now booking indexed losses. Since there is no need to reinvest in real estate to reduce capital gains, this money is now going to other asset classes. This is one of the reasons for the reduction in investment demand for real estate.8. Avoid FDs, go for RBI bondsThe RBI cut rates aggressively in 2019. While borrowers were happy, investors in fixed income instruments saw their returns come down. SBI reduced its 5-10 year deposit rates to 6.75% for senior citizens and 6.25% for others. Though co-operative banks and some small private banks are offering higher rates, investors should avoid investing in them. The PMC Bank crisis shows how the entire principle can get stuck just to earn an extra 1-1.5%.These investments are better than bank FDsBut they are more lucrative for investors in the lower tax brackets. 73005337 Senior Citizens’ Saving Scheme and PM Vaya vandana Yojana are only for senior citizens and maximum investment limit is Rs 15 lakh eachHowever, interest rates on government sponsored schemes like the Senior Citizens’ Savings Scheme (SCSS), PM Vaya Vandana Yojana (PMVVY), National Savings Certificate (NSC) and RBI bonds are still quite high nin comparison. These rates have not changed since July 2019 and are unlikely to be changed now. While SCSS and PMVVY are only for senior citizens and the maximum investment is `15 lakh each, there are no such limits for NSCs and RBI bonds. “RBI bonds are a good option for investors who are relying on FDs for regular income, because they offer guaranteed half-yearly interest payments,” says Melvin Joseph, Founder, Finvin Financial Planners. Many people are not aware of this option and are therefore stuck with bank fixed deposits.The only problem is that the interest on RBI bonds is taxable. In the higher tax bracket, this reduces the return significantly. But investing in debt funds is not of much help because returns of safe categories such as liquid funds and ultra short-term have come down to around 6.5% in recent months. “If you have risk appetite, you can go for credit risk funds for higher yield,” says Kothari.9. Status quo on emergency fundRaise it to 8-12 months’ expenses only if you are in a volatile sector.Given that the biggest certainty of 2019 has been a rise in uncertainty, it helps to be prepared for it in 2020. In normal circumstances, with a stable economy and thriving markets, experts suggest a contingency fund equal to 3-6 months’ household expenses. “This should include insurance premiums and EMIs and the corpus should be reviewed every year,” says Financial Planner Pankaaj Maalde.In the past year, however, economic downturn and market turbulence have increased the risk of a sudden job loss, with various companies across sectors letting go of employees. The automobiles sector alone accounted for 3 lakh job losses and 10 lakh jobs were hit in the auto component manufacturing industry till July 2019, as per the Society of Indian Automobile Manufacturers. The telecom, IT, tech startups, media and entertainment, manufacturing, consumer white goods and hospitality are other sectors facing dismissals. Does this mean you should build a bigger emergency corpus?“The market and economy have nothing to do with the size of the emergency fund as investments should be linked to goals as per a defined asset allocation. Even if there is a job loss, six months’ expenses should be enough to sustain you till you get a new job,” says Maalde.Agrees Jayant Pai, Head, Products, PPFAS Mutual Fund: “The size of the fund should be inversely proportional to one’s current and perceived economic situation. However, since predictions are difficult to make and often go awry, it is prudent not to calibrate this amount based on speculation.”So, increase the size of your emergency corpus to 8-12 months’ expenses only if you are in an especially risky or vulnerable sector or one that is facing greater volatility. You could do this by reducing discretionary expenses like eating out till you have amassed the required corpus. What’s more important is to ensure that these funds are invested in liquid options, such as a liquid or short-duration fund, to make them easily accessible.

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