From the extreme depths that the stock markets plunged to from January to the last week of June 2022, investors experienced a breather as companies posted higher earnings prompting the markets to green. Compared to global markets, Indian markets fared better in July as both new and old investors kept pouring in with more money to avail of benefits during this sudden surge. These investments came through lump sum investments in existing mutual funds and parking money in new fund offers (NFOs) announced by various fund houses.
The fall in equities, as opposed to the continued bull run in 2021, was not surprising as many analysts had anticipated corrections in the valuation of many stocks, especially, those in the technology sector. The geopolitical situation stemming from the sudden Russia-Ukraine fiasco also caused the stock markets to their first decline in seven years due to inflation and the fear of recession largely looming on everyone’s minds. Nifty alone rose 8.60 per cent in July this year from 15,799.10 to 17,158.25 points. Meanwhile, Sensex also gained 8.56 per cent. Investors gained the most in the month of July that performed best since August 2021 and November 2020, respectively.
Soaring inflation around the globe worsened due to the Russia-Ukraine war and is set to go up with fresh tensions brewing between America and China over US House Speaker Pelosi’s visit to Taiwan. The Feds have hiked interest rates that are expected to go up further causing the banks to raise interest rates on loans and other kinds of debts.
Recession is now official in the US with its aftereffects soon to hit India along with the rest of the world. One can see signs of economic slowdown already though analysts estimate that its effect will be more severe on the West. However, with recession already at our doorstep, it makes sense to gear yourself financially. Timely control of our finances will help us survive the coming recession though it would take a lot more than savings to weather the storm that is in store.
Check your regular income sources
Do you have access to a regular income? If yes, what are the risk factors that may affect its regularity? The recession will impact different sectors in different ways, so you must gauge the risks to your regular income accordingly. A lot depends on the firm you work for and the demand for its goods and services. A sudden and drastic cut down in the demand for the products of your firm might result in your job loss, which is why you must be now careful about your job. Do not take the risk of looking for new jobs or agreeing to take up new roles in other organizations. If you are unsure of your job security, look for alternative income sources too. These small additional income sources will help pay for essential commodities whose prices can go up drastically during this season.
Focus on savings
Inadequate savings often force people to chase high returns. They make not one but two mistakes of saving less and risking more. Need to remember that there is no substitute for high savings. During this recession, ensure that you have enough cash in hand and at the bank to meet unforeseen expenses. Do not underestimate the importance of having an emergency fund in place. Remember that emergencies can strike at any time without your calling, so it makes sense to be prepared for them.
Do not invest in a hurry
Avoid herd mentality when it comes to investing. You do not have to follow people rushing to park their earnings in allegedly high-yielding bonds just because they think it is “smart” investing. This is not the right time to speculate on gold, dollar or oil, the three pillars that would decide how the economy would progress henceforth. Beware of investing in stocks. There are chances that the market would suddenly shoot up following some positive speculation or news to again drop down. New-age investors without realizing the risks involved buy when the stocks are at an all-time high, thus, forcing them to book losses when the market falls down or wait for the shares to resume growth to their purchase prices. There may be a slump in real estate prices due to economic slowdown and subsequently low demand, but that must not encourage you to park your funds there now.
Know your stocks well
A common blunder that stock market investors make is buying penny stocks at throwaway prices hoping that they would benefit from the price rise. This is because weak businesses will suffer more during the recession as opposed to companies with huge market capital. Tough times beget wise decisions, so do not be in a rush to invest in cheap stocks hoping that they would be the next multi-baggers when the market goes up. The market rewards only earnings and growth, which is why speculating on such stocks would only backfire. However, if you have been sitting on cash and hoping to invest when the market goes down, you may wait before you commit a part of your earnings to large-cap stocks and secured government bonds promising good returns in the future.
Hold on to your dreams of becoming an entrepreneur
It is indeed the best feeling to take charge of your business but not surely the right time to do so. This is not the right time to be an entrepreneur considering how the demand for goods and services would shrink during the recession. Your business would struggle to get clients, thus, impeding its growth. While all businesses including the profit-making ones would suffer, new businesses are affected most due to low cash in reserves and the inability to garner enough earnings to sustain their growth. In fact, you must use this time to look for multiple income sources and increase your cash reserves so that you can fall back to meet sudden financial needs.
Avoid selling in shock
The recession is bound to send shock waves across the economy. You may be in dire need of money to meet your expenses. This may prompt you to sell your stocks in a jiffy. Some even go to the extent of selling off their properties to escape the burden of loan repayment. This selling behaviour is bound to trigger extreme monetary losses as you would be losing from the sale of such assets. Recession has a damning effect on assets’ prices. However, it is never right to sell off your stocks when the prices are falling.
Timing the market is not possible. Investors lose more money in timing the market instead of resorting to a disciplined, investing behaviour. Moreover, panic causes many people to engage in revenge trade hoping to recover losses, which never happens. Unless you are in dire financial distress, never consider selling off your assets. You must remember that investment is a long-term proposition, which is why you must lend more time to your investments to benefit from the compounding effect. Stay invested irrespective of the continued economic cycles and downtrends affecting India’s economic growth to benefit from returns when the global economy resumes.
Do not incur new debt
While planning your finances, you must be aware of the extent of debt or liabilities that you incur. Do not incur new debt. This is because interest rates are slated to rise more in the future making debts costlier than before. In the event of continued rate hikes, you will have to shell out more money as interest. So, put a brake on all those ideas that would require taking up additional loans or opting for new loans. This is especially true if you have an erratic work profile or are unsure of the security that your job provides.
Too much debt may force you to cut back on your savings, which is another sign of impending financial insecurity in the near future. Prepay your loans, if possible, before the next rate hike sweeps the floor from under your feet. It is okay if you are finding it difficult to save more money; just remember not to add any debt.
Prefer investing in short-term debt
The recession will have a massive impact on the stock market, which means that we may witness the equity markets plunge down to an all-time low again. While this may be the best time to invest in equities for those with a long-term investment horizon, not all may consider following this proposal. If you think that you may need extra cash at any point in time, park your funds in short-term debt.
Short-term debt funds including liquid funds, are the best option that you want to fall back on in case you are in imminent need of cash. This is because you can seek immediate redemption of these funds with the money being credited to your account within a few hours.
This is not the right time to be reckless with your spending. Cut down on your lifestyle expenses. Put your travel plans on hold. Do not spend on unnecessary things. There is a fear of prolonged recession this time, thus, leaving you with not enough money to meet your necessary expenses. Things are set to get costly.
Your spendthrift behaviour will leave you no or very little money to pay for what you or your family may need. Cut back on discretionary expenses. Keep a tab on the money that your family spends. Try to make do with whatever little you have instead of extending yourself to meet unwarranted expenses.
It is natural for most households to cut back on unwanted expenses, thus, making them less prone to income risks and interest rate hikes.
Protect your income
It is a good feeling to have enough money in hand. However, this does not warrant you to have a laidback approach in your intent to earn and spend. Recession is the time when you must protect what you have. You must keep your income and savings secure.
Furthermore, you must not spend unnecessarily to protect your wealth from being eroded. If you have been yearning to invest your hard-earned money, then take a pause and check your investment horizon. Those intending to hold investments for a prolonged period of up to five years and more may invest in equities, sovereign gold bonds, gold mutual funds, silver exchange-traded funds, secured bonds and stocks of fundamentally strong companies.
Adding a few debt funds, especially the short-term ones, will ensure that you keep adding to your income without leaning on what is saved in your bank accounts.
If you are in the midst of a financial crisis already, the coming recession will only increase your money worries. You must try to cut down on your debt and look for alternate income sources that will ensure continued money inflow in your accounts. It does not matter if your added sources only generate moderate income; what matters is that you must have enough money to pay for your essential expenses.
Be prudent with your money
Remember that you are not alone in this vicious economic cycle synonymous with recession. Your assumptions regarding your investments may go wrong. This is the time when you must hold on to your job to ensure continued income in your account. This is not the time to play smart. Instead, be prudent with both your savings and expenses.
Invest wisely, but do not go overboard with them. Money earned and saved today will help you survive the downturns tomorrow, so it makes sense to be wise about your money matters now to avoid getting gulped down by the recession effect.