Don’t Let COVID-19 Derail Your Long-Term Investment Plans

With increasing financial awareness in the country, financial products have gained wider acceptability. There are various types of investment. Some investments are made with a short-term objective with the maximum investment tenure of five years. Short-term investments are relatively liquid and can be easily converted into cash. However, short-term investments may not generate returns sufficient to achieve life goals, which requires substantial capital accumulation. Wealth can be accumulated only by staying invested for the long term.

What are long-term investments?

Long-term investments are financial products that are designed to generate considerable returns over several years, generally through investments in the financial markets. Long-term investments like unit-linked insurance plans, and other systematic investment plans have emerged as one of the ideal options for achieving life goals ranging from retirement to children’s education. The money that is put into long-term investments compounds for many years, which transforms a small amount into a substantial corpus at the maturity of the investment. Majority of long term products invest the funds accumulated from investors into market-linked assets like equity and bonds.

Impact of COVID-19 on financial markets

While equity and bond markets give consistent returns over the long term, certain events may lead to widespread chaos in the markets. The rapid spread of COVID-19 pandemic and the sweeping restriction on movement put in place to slow its spread has wreaked havoc in the global economy. Financial markets are a reflection of the broader economy and hence the markets have been severely impacted. Trading in stock markets in major economies like India and the US had to be halted on multiple occasions in March due to heavy sell-off. Indian benchmark indices like Sensex and Nifty declined 23% each in March as foreign investors sold equities relentlessly.^[1] Value of several long-term investments eroded in the COVID-19-induced market crash. Events of global scale like the pandemic are not unprecedented.

So, how should one protect his/her investments?

Risk management is as important as profit maximisation if your aim is to accumulate a sizeable corpus over time. Long-term investments are designed to reduce the impact of market volatility and minimise risks. There are many types of investments and some like ULIP plans provide benefits to manage marker-related risks and provide for a Life insurance cover.

ULIPs provide the option to choose from a host of equity and debt investment funds. Once an investor finalises a fund, a number of units are allotted to him/her. The number of units depends on the fund value and the amount invested. Policyholders generally invest thorough regular payments instead of a lump-sum amount. When you make regular payments, the amount is used to buy units in the selected investment fund at the prevailing fund value. During a market down cycle, the same amount fetches more units than during an upcycle. If you keep investing even during a volatile market, you will add more units and the cost of all the units will average out over time. The concept is known as rupee cost averaging and investors in popular long-term investments like ULIPs and SIPs will gain from it.

Power of compounding

Short-term volatility in capital markets is a common phenomenon. Even then, long-term investments deliver considerable returns over time. When you leave the invested money untouched for a long time, it starts growing exponentially due to compounding. When the interest earned on the initial investment becomes the principal amount and earns interest, the total corpus increases rapidly. The power of compounding minimises the effect of short-term fluctuations over the long term.

Tax incentives

The government promotes long term investing through tax incentives, as it strengthens the financial markets. Most long-term investments provide a host of tax benefits, functioning as tax saving investments. One of the biggest benefits of tax-saving investments is the cost of investment reduces due to the lower tax. If you have to pay a higher tax on an investment, the returns are suppressed.

Volatility in equity markets is unavoidable which could lead to severe market crashes. The best strategy is to remain invested, but what are the alternatives for investors. Investors seeking safety as well as returns may opt for Guaranteed Life Insurance Plans, which are insulated from market volatilities. Risk-averse ULIP investors can opt for a debt fund during excessive volatility in equity markets. Switching between funds does not cost anything and debt markets are relatively stable when compared to equity markets. When the outlook for equity markets improves, investors can simply return.

Conclusion

Sudden market crashes can unnerve even the most stable investors. The current market crash due to the rapidly spreading pandemic too has disturbed several long-term investors. However, equity markets have always recovered strongly after a disastrous year. Rather than being disappointed, investors with a long-term horizon should accumulate more shares or fund units during the current crash. COVID-19 has presented an excellent opportunity for long-term investors, which should not be missed. Investors should, however, tread with caution.

Reference:

^[1] https://www.moneycontrol.com/news/business/markets/investors-lose-over-rs-30-lakh-cr-in-march-43-stocks-in-bse-500-fall-over-50-5093231.html