This year, the business environment has been marred by unpredictable and unprecedented events. The COVID-19 pandemic has also shrouded the future in great uncertainty. Predicting investments or sentiments or the income potential of different asset classes is a hazardous job in such times, but let me stick my neck out nonetheless and say something about managing personal finances in 2021.
Managing one's finances effectively assumes paramount importance in uncertain times, as it can help one tide over challenging times. For this, some amount of financial literacy and planning is a must for all – after all, idle cash loses value with inflation, and plain vanilla bank deposits offer low returns, so you should look to create a well-balanced portfolio which is diversified across time horizons and asset classes.
A stable income typically comes under threat in uncertain times, so a contingency fund is a must. For this, look at a liquid asset class, despite the lower adjusted returns it might offer in comparison to illiquid assets. Mutual funds are recommended here as they offer better risk-adjusted returns over the other short term asset classes, along with the benefits of diversification.
Diversification must also be a key element in planning your long-term investment basket, especially if you have a low-risk appetite. Here, I would recommend looking at gold, value stocks and property. In risky times and a negative business environment, gold has always proven to be a good investment. Besides, 22-carat gold has entered the stable range of Rs 47-48k for 10 grams after having been priced exorbitantly during the pre-vaccine COVIDera.
In times of increased volatility, investing in value stocks is also recommended, as they yield good returns arising out of price differentials. Value stocks are shares of companies that trade at a low price compared to its ‘fundamental’, that is, its earnings, sales, and other such basic metrics. The other important asset to invest in 2021 is property, especially considering attractive interest rates are at an all-time low, which makes borrowing and home loans cheaper.
In responding to the pandemic, the Indian government adopted a “Barbell Strategy”, which is an investment strategy wherein the investor hedges, or guards, against the worst possible outcome and adjusts the investments as and when more information becomes available. The above personal finance advice will also help you build a portfolio that will guard against a tumultuous 2021 should we have one, but do keep your eyes and ears open, along with a healthy dose of financial literacy, in order to be able to adjust as the year progresses.
Neha Arora, Assistant Professor of Finance at Indian School of Business & Finance, a Featured Teaching Institution of the London School of Economics, which offers Finance programmes from the world’s 4th ranked Finance department.
