The second wave of Covid-19 in India has disrupted the lives of several investors. More and more families witnessed mourning over their loved ones more than ever. With the country’s most significant cities wobbling under the negative effects of the second wave, several economists are worried about its effect on the economy. This has led several investors questioning about their mutual fund investments. One such question includes what should they do with their equity holdings? Is it the right time to convert their equity assets into cash and cash equivalents given the likely third wave predicted by several experts? In this article, we will try to answer that question for you. We can approach this concern by focusing on three underling issues. These are:
Question 1 – How is the surge in the second wave of Covid in India likely to impact the economy?
The extent of the impact of the Covid-19 wave in India is dependent on the duration of the wave. Though it is extremely difficult to pinpoint exactly the peak of the wave, the experts believe that the economic rate growth of the Indian economy may fall from the previous 11% rate to 10%.
Question 2 – How will this impact the Indian equity market in specific?
It might be a futile exercise to divine the short-term performance of the equity markets as the reasons you attribute right now could be extraneous in the near future. International market performance, company results, liquidity, election results, interest rates are some of the factors that can majorly impact the performance of equity holdings over a period of couple months or years.
Question 3 – What are the projections of the Indian equity markets based on what we know? What investment decision makes most sense right now?
The growth rate of the overall economy or GDP (gross domestic product) is something that is most significant in the end. Of course, there are going to be other parameters as well that will influence the prospects of the Indian equity markets, but the long-term flight of any country’s equity markets is influenced by the growth of the GDP or the economy.
So, what should you do given the current market scenario? Should you decrease your equity allocation in your investment portfolio?
History is a testament that the stock markets have almost continually recovered from different types of crisis. The only difference is the time taken to recover from the shock and the turbulence. Just like equity investing, economic growth is a long-term exercise. Considering this aspect, it might not be an ideal situation to take all your money out of your equity holdings unless one is in dire need of cash. To ensure that you do not dig into your long-term investments or savings, it is essential that you have an emergency fund in place. A good idea is to allocate your six to twelve months of living expenses in liquid funds. Also, it is important that an investor is mentally prepared about the short-term volatilities that their equity holdings are likely to go through. Happy investing!