Poll results can be a rollercoaster, often defying expectations set by exit polls. Haryana’s Assembly Election results are a prime example of this. While most exit polls predicted a clear victory for the Congress, with estimates ranging from 44 to 62 seats, the results took a dramatic turn. As counting progressed, the Bharatiya Janata Party (BJP) surged ahead, eventually leading with 48 seats, defying most pre-election predictions.
This start divergence between exit polls and the actual outcome highlights how unpredictable elections can be even with the data-driven analysis backing projections.
Similarly, financial markets and your personal finances are riddled with such uncertainties. Like election forecasts, your financial future can be swayed by unseen factors like market fluctuations, global events (war, pandemic, etc.), or sudden changes in personal circumstances. So, how can you prepare for financial uncertainty in the same way politicians brace for unexpected poll results?
Here Are Some Strategies To Beat Financial Unpredictability:
1. Buy Term Insurance: Says Shankar K, Sebi Registered Investment Advisor (RIA), “If you are a sole earning member of your family, the first thing you should do to secure your finances is take a term insurance plan.” Why? The death benefit paid out by a term insurance policy can help you mitigate expenses in case of an unfortunate event such as outstanding debts, living expenses of your family, etc. Moreover, term insurance plans also come with tax benefits such as tax deductions on your premium and a tax-free death benefit.
2. Be Medically Insured: “The second important thing is to take a reasonable amount of medical insurance over and above what your employer provides,” Shankar says. As the old saying goes health is wealth, one must ensure that one secure this wealth health insurance coverage for oneself and the family especially given the rising cost of medical inflation.
3. Load up on Vitamin C (Cash): Says Naresh Bulchandani, CFA, CAIA, Head of Products, Merisis Wealth, “A healthy asset allocation comprising investments in Cash equivalents (viz liquid funds/arbitrage funds / short term Bank FDs) is designed not just to survive, but even thrive amid volatility and uncertainty.”
How does this work? Bulchandani explains: Your cash holdings protect you from the probability of financial ruin and are your safety net when your equities fall as markets oscillate from euphoria to paranoia. Moreover, a portion can also be reallocated to buy equities when these are cheap, helping you reach your financial goals faster once equities rebound.
4. Don’t forget to take your Vitamin G (Gold): Why? Says Bulchandani, “Allocation to the gold asset class is universally accepted to be your best hedge to adverse events (like War, Calamities, etc). When fear in the equity markets rises, we see all kinds of investors like global Central Banks, institutions, and individuals seeking refuge in gold, which actually appreciates in uncertain times.”
What are the best ways to invest in Gold? “While holding physical gold and jewellery has been the Indian obsession, a preferred mode of investing is allocation to financial gold via Gold MFs, Gold ETFs, SGBs, etc. to circumvent the value loss from impurities, making charges, storage charges of safe deposit locker rents, etc,” he advises.
5. Invest In Balanced Advantage Funds: Shankar suggests investing in balanced advantage funds (BAFs) or mutual funds that adjust equity exposure based on market conditions. What this means is that the fund automatically does the task of asset allocation, which would have to otherwise be done by an individual investor. This can help manage risk and provide better returns over time. BAFs are known to be more tax-efficient for investors.
6. Build Emergency Fund: “Build an emergency fund that equates up to 6 months of your regular income,” Shankar suggests. Because emergency funds can be your best bet against unforeseen circumstances and ensure that you are financially protected.
7. Seek Safety In Defensives: Bulchandani suggests investing in defensive stocks which are shares of companies that generally exhibit low volatility through all phases of the economic cycle. They're non-cyclical, meaning they are typically not sensitive to the different phases of the economy between bull and bear. “These are low-volatile stocks belonging to sectors such as Pharma, FMCG, etc. where historically the impact of uncertain events has been limited and contained. One can invest directly in defensive stocks or sectoral MFs or Index funds representing these sectors,” he states.
8. Big Is Beautiful: Bulchandani further says individuals can build a portfolio with investment in large caps mutual funds which are relatively stable. “Large-cap equities are inherent ‘weather proof’ owing to their longer vintage indicating survival across market cycles, robust financials including strong Balance sheets,” he notes. One can invest directly in large-cap stocks (typically the largest 100 stocks by market capitalisation) or large-cap MFs or Index MFs and ETFs tracking large-cap indices like Nifty 50 or BSE Sensex 30.
9. Beware Of Misselling: Finally make sure you don’t fall into any misselling trap at the hands of any insurance agent, stockbroker, mutual fund distributor, or financial expert, Shankar advices. “By securing your health and financials with a health insurance and term plan (respectively), investing in BAFs, and building an emergency fund to survive unforeseen times - an individual can beat financial unpredictability,” he says.
Past experience bears witness that poll outcomes have at best (or worst) short-term impact on your portfolio, while in the long term, its factors like corporate earnings, growth prospects, and valuations reign supreme, Bulchandani explains. Therefore, he advises keeping emotions under check and avoiding knee-jerk reactions while making changes to the investment portfolio in such circumstances.
He says it’s best to stick to one’s long-term Strategic Asset Allocation as making unplanned changes leads to adverse consequences in terms of:
a) Exit loads on premature withdrawals
b) Higher taxation via short-term capital gains vs long-term
c) Market impact due to short-term volatility
To make any significant changes to your investment portfolio it’s advisable to take guidance from an expert, generally, a certified wealth manager or financial advisor. Confused about how to choose your financial advisor? Read Here.
