Protect returns in the current scenario

As headlines about the spread of Covid-19 beam through newspapers, people across the world seem to be grappling with the uncertainty around the depth of the impact of the pandemic. The contagion effect has embraced both developed economies as well as emerging markets.

As central banks across the world look to sharply reduce interest rates in response to economic slowdown due to the pandemic, its impact on personal finance portfolios is also unfolding quite rapidly. The intermittent churn witnessed in the stock markets, is a further indication of the fact that it is time to relook at investment strategies. Here are a few guide rails to navigate this market turbulence and protect the returns on your investments.

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Playing it by risk appetite

A time like this presents an opportunity to use your own (i) long term financial goals, (ii) income replacement for your family in case of your death/ disease/ disability, (iii) short term liquidity needs, and (iv) your resultant risk appetite, to act as a lighthouse that guides your individual investment strategy as you navigate the stormy waters of market volatility.

In order to select the most suitable investment options available, reassess your risk appetite by asking yourself the first three questions - what would happen if in the short/medium term you lost some or most of the money you’re putting into your long term investments, how much money is being invested, how many people depend on you financially and if you have any other urgent financial commitments.

What are your investment options for guaranteed returns?

If you have a moderate investment risk appetite or dependents to look after, or specific life goals to accomplish, check for options below that would provide you guaranteed returns.

Fixed Deposits: Fixed deposits are among the safest investments to make. Not only do they provide a reasonable rate of return when comparing with other low-risk investments, but interest rate earned is added to one’s income and is taxed as per one’s income slab. Furthermore, fixed deposits have an option of locking returns over the short-term, typically up to 5 years.

Post Office and Government Small Savings Schemes: For people looking at low-risk adjusted returns, the post office and government small savings schemes offer sovereign guarantee. These small savings schemes are easy to invest and offer consistent returns away from market risks. With instruments like National Savings Scheme, Kisan Vikas Patra, Senior Citizen Savings Schemes and Sukanya Samriddhi Accounts, investors, both rural and urban can invest in products which offer risk-free returns with reliability.

Life Insurance: Life is all about fulfilling dreams for yourself and your family, like providing for children’s education, planning for retirement, or creating a legacy. However, in an environment which is full of uncertainty and volatility, you need surety that these dreams will be fulfilled, even with economic and investment uncertainty and further, if you are not around. Life insurance can help you get this reassurance.

For instance, there is one type of insurance plan that is fully guaranteed and rapidly gaining popularity in times like these, wherein you pay premiums for a limited period (say 5 or 10 years) and you will receive (i) a guaranteed one-time maturity value or (ii) a guaranteed, steady stream of monthly income or (iii) both of the above. In a declining interest-rate scenario and/or time of market volatility as we are witnessing today, such guaranteed insurance plans offer a guaranteed amount on maturity irrespective the fluctuation of rate of return, thus securing a consistent and risk-free return in the future to meet your important financial goals.

For those who do not want to pay recurring premiums, a typical annuity plan from a life insurance company requires you to pay a one-time, lumpsum premium and provides you guaranteed monthly income for the rest of your life starting from the very next month. If you defer the pay-out by say 10 years, you could typically receive higher guaranteed, lifelong monthly income.

And lastly, remember to buy adequate ‘pure protection’ plans to provide your family lumpsum or income benefit in case of your untimely death. These ‘term’ plans offer cover for several decades into the future, with convenient limited payment or regular payment options, monthly or annual mode of premium payment, with or without return of premiums paid, and options to cover critical illnesses and/or disability.

Whether you need to adjust your investment strategy this year or a few years down the line, that decision should ideally be based on your risk tolerance.

(The writer is Deputy Managing Director Max Life Insurance)