The IMF predicts a 10.3 per cent contraction for the Indian economy in 2020. What according to you are the key methods by which the government can look at reviving the economy?
Covid was the straw that broke the camel’s back. The Indian economy had not yet recovered from the disasters of demonetisation. GST further impacted the states’ flexibility and the informal sector. The collapse of ILFS and the credit crisis in banks and NBFCs are all inter-connected and stem from the slowdown in growth seen since 2017. We are now staring at losing two years of economic growth. The government’s response to the pandemic has been shocking. We estimate that the total income and investment impact to the economy would be around 10 per cent of GDP. The central government’s direct cash and in-kind support has been less than 2 per cent of GDP. The government imposed the lockdown and took away the ability of millions to work and earn. That income loss needs to be compensated for. This is not an economic issue; it is a moral issue. For a poor country like ours, it will take years for certain segments to get their lives and livelihoods back on track. The government should transfer more money into the hands of the people. The technology is available (Jan-Dhan), the money is available, but the intention is missing.
What advice would you give the Indian middle class with regard to investing in such a scenario?
Follow the 24-80-20 rule. Depending on your job, business and their stability – keep aside six months to 24 months of your basic expense aside as an emergency corpus. It could be cash under your mattress, in a bank savings account, in a safe liquid fund. Do not take any risk with it. This money is to help you and family in case you lose your job, or in times like these when the government forces you out of business. The more volatile your job/ income the higher should be this emergency corpus. Once you have created this corpus, allocate the rest of your savings between 80 per cent equity and 20 per cent gold.
Do assets such as gold, art etc. make sense especially now? Which of these should be the focus?
Buying art is not an investment. Buying art is a passion. Investing should be simple. Investing in art is not simple. Every investment portfolio should have gold. Gold is your “portfolio Insurance” — it does well when other assets do not perform. There is a reason why central banks own gold. Gold is a hedge against crazy central bankers. Gold is a hedge against crazy politicians. In a socially tense, unequal, divided society, the real asset to own is gold.
Indians are natural buyers of gold, mostly jewellery. For investment purposes, we need to continue to educate people to invest in gold through efficient instruments like the gold ETFs, gold funds and gold bonds.
The other aspect of diversification would be for those who wish to send their kids overseas for education. Given that the Indian rupee depreciates against the US dollar, your kids’ fees in Indian rupees will keep on increasing. To keep it simple, you can diversify and hedge this risk by investing in gold and/or a low cost international ETF investing in global equities and debt
For a majority of Indian investors, the diversification that they require is to move money away from fixed deposits into equities. If they find all this complicated and risky, they should just invest in a pure asset allocation fund that invests in a mix of equity, debt and gold.
What are the key financial lessons from Covid-19 for the country and the individual?
India is a low-income country. Over the years, sustained growth moved people out of poverty. Events like Covid are a shock and can move many millions back into poverty. The fact that the government has yet not supported peoples’ lost income by citing lack of resources suggest how fragile the country’s finances are. So, people cannot trust the government for support.
We did a study that showed that many companies do not have cash and investments to pay salaries on zero revenues even for six months. So we see employees being laid off. So you cannot trust your employer. Very few can and follow the 24-80-20 rule. So most do not have a savings buffer.
Priorities of governments, corporations and the individuals have to undergo a change. For example, if everyone cared and demanded better healthcare and the governments and corporations and investors would have invested in creating more hospital beds, the world may not have needed the lockdown.
This is a social issue. As a society, we need to evolve a more just and humane approach to deal with such crisis. Climate, health and social risks are going to increase. Governments, corporations and investors need to be made accountable.
Investors would also have to worry and think about the environment and social risks they engender through their investments.
What are your views on the recent regulatory development that disallows the 1 lakh-plus distributors from giving any advice on mutual funds?
Over the last 10-12 years, SEBI has taken many steps to make investing in mutual funds simpler, cheaper, transparent and investor friendly. The move to separate advice and transaction needs to be seen from that perspective. A majority of these 1 lakh-plus distributors, mostly Individuals, will move to become registered investment advisors (RIAs). They will charge the clients a ‘fee’ for their advice instead of getting ‘commissions’ from the mutual fund companies. So they are in no way going out of business. In a large country like India, with low financial literacy and low investments in mutual funds, there will be millions who will need advice on managing their investments and planning their finances.
The advent of RIAs has already triggered innovation and we now have many zero cost or low cost platforms for investors to invest. We may similarly see emergence of distribution only platforms.