Should Investors bet on beaten down stock?

Beaten down stocks have different risk-reward characteristics compared to trending stocks and have the potential to provide a good rate of return and beat benchmark indices. Of Late, Investing in the stock market has been most confusing for individual investors. In such a scenario what should investors do and is there still scope to participate in the market?

Reasons for the fall

Though the World Health Organisation (WHO) has sounded an alter about a new corona virus during the last week of December 2019, it had not affected Indian then. The magnitude of the pandemic was realized only when it hit our country and the number of cases and deaths started moving upward. Based on the WHO announcement, many countries suspended passenger traffic to stop the spread of corona virus. This threatened smooth functioning of businesses. India also prohibited entry of any international cruise ship, crew or passenger with travel history to corona virus hit countries to its major ports. 

Meanwhile, Foreign Institutional Investors (FII) have continued selling Indian stocks, As per NSE data, FII have been net seller every day since February third week. In March alone, they withdrew a net Rs. 20,831 crore from domestic markets. The carnage in march is also partially attributable to oil related fund based selling as there was a sharp fall in crude oil prices. 

Reasons for the recovery

Various announcements of the Reserve Bank of India on lending and supporting the economy sent positive vibes to the market. Sectors such as MSME, NBFC rural economy, banks etc. were the beneficiaries. The pharma sector regained attention of the investors after 3 years of under performance. Cement, metal and auto are favored sectors in the short to medium term. The smart recovery is also attributable to Foreign Portfolio Investors (FPI) as they like to invest in high beta stocks, especially in emerging markets such as India. 

Can Investors consider beaten down stocks?

Despite such a wonderful recovery, there are many stocks that have not fully recovered. Let us call them beaten down stocks. For our discussion purpose, let use define beaten down stocks as those shares whose prices have fallen by more than 50% from the January level. It is easy to recognize these stocks but difficult to invest as momentum is lacking in such stocks. Essentially, beaten down stocks have a great potential to provide a good rate of return and could beat benchmark indices once investors recognize such stocks. 

How to choose among beaten down stocks?

Before investing in a beaten stock, investors should study about each stock. Investors need to identify the major problems faced by those companies and identify the possible solution which might trigger recovery. For instance, if the courts have given a favorable verdict to a telecom company on computing its adjusted gross revenue or a reputed group is investing a significant amount of money in it can be interpreted as a good signal. 

To conclude, beaten down stocks have different risk-reward characteristics compared to trending stocks. So, investors should carefully choose beaten down stocks for a higher risk-reward ratio than simply investing only in momentum stocks.

Why we need to talk about wealth Creation

Financial literacy and financial independence will happen when we are open to discussing about it. 

In today's world there are logins, passwords and OTP for literally everything to do with life. The world of finance is becoming more reserved for valid reasons, the most common reason is that wealth is an extremely personal topic. Trusting others is not easy, eventually avoiding discussions on money and wealth. We often reach a stage where we don't even discuss it with our family; talking openly with friends and colleagues is rare these days. Just like personal life, there are different phases in financial life too. Most personal life emotions such as excitement, happiness, anxiety, fear exist in financial life also. In personal life, we discuss these phases with others to express ourselves, get solvable and resolve issues; doing the same in case of personal finance is equally important. There are many who are doing will with their finances and may need the right motivation to take it ahead, again there are those who are fighting the battle of financial stress on their own and appear exhausted. One way to make this perceived complex topic of finance simple is to have relevant discussions. 

Money & Wealth

Let us take the first step here itself. Is it always that people that people with more money are more wealthy. We often use money interchangeable with wealth, but money is different from wealth. As per definition, money is something generally accepted as a medium of exchange, a measure of value, or a means of payment. Wealth on the other hand is a great quantity or store of money or a state of being rich, prosperity, affluence. There is a difference between money and wealth and so is the difference in having money and being wealthy. Money is the starting point and not the final product. It is one of the elements along with others. In the case of wealth creation, right assessment, investment avenues and time horizon play crucial roles along with money. 

Everyone has 24 hours in a day, the differentiating factor is how do we utilize these hours. Similar is the case of personal finance, a few people are successful in the journey of earning money to wealth creation, some put in much effort and progress gradually while there are others who probably need to give more attention to wealth creation. 

One way to build wealth wisely or start thinking in that direction is by sharing knowledge, experiences and progress. Like in every discussion, right knowledge leads to evolution and wrong takes us closer to disaster; hence we must be wise in sharing the right advice and do our homework before accepting any advice. We go for weeks or months of discussion before deciding on which gadget or vehicles or house to buy. Why not discuss similarly when it comes to managing money and wealth. All the buzz around financial freedom cannot progress unless there is financial literacy and financial literacy and financial literacy will only happen where we are open to discussion on it. 

This Independence day take the right steps towards financial independence. 

Personal Finance in COVID-19 (Contingency Planning)

We are already deep inside the Covid-19 crisis but the end of the tunnel isn't yet in sight. It's time to put in extra effort to build a  financial contingency plan.

Focus on boosting your cash reserves
Widespread job losses, pay cuts and diminishing business earnings have defined these uncertain times. If you lose your job or income amid such a situation, getting your income channels back on track could be difficult if not impossible. As such, a standard emergency fund worth three months of your expenses might not be adequate. It's time to increase its size to at least 6-12 months of your expenses if your current finances permit. This fund will be your primary cash reserve if you, unfortunately, lose your income in the coming weeks or months. 

To achieve this target, you must exercise strict cost-cutting measures and minimize non-essential expenditures. The lock down may help you in this to some extent as you no longer have to bother about expenses like daily commutes and shopping. You can also try to carve out a dedicated Covid emergency fund in addition to your regular contingency fund and park your savings in a highly liquid instrument like a FD or a saving bank account.
Top up your income plans
Maintaining adequate insurance cover is of utmost importance during this phase of heightened health risks. Aim for a life insurance cover worth at least 10 times your current annual income so that your dependent family members are not left in the lurch if something untoward were to happen to you. For that, see if you could top up your existing life insurance plans. 

Also, you risk losing your emergency fund if any of your dependent family members require hospitalization. So, buy a health insurance plan for your family if you don't have one already, or top-it up or get a super top up to at least $10,000 cover if your existing plan is of lesser value. This is also relevant for those who are solely dependent on their company  provided group medical plans because those would be of no use if you lose your job in the current crisis. Adequate insurance cover will give you the much needed mental peace, especially if the Covid crisis persists.

Servicing Home Loan
Now, these are also the times of record-low home loan interest rates. So, if you have the necessary out-of-pocket funds and you get a good deal on your preferred property, you may start a home loan at this stage after a careful evaluation of your finances. However, in doing so, ensure your contingency funds and insurance protection do not get impacted. If you're unsure, see whether you could delay your plans until things stabilize. 

Also, it might be a better idea to go for a ready-to-move in property than an under-construction one as the latter may involve a delay in project completion due to the ongoing lock down. Besides, you may also go for smart repayment options where you pay only the home loan interest and not the full EMIs until you get possession. 

Invest Sensibly
Firstly, avoid starting a new investment if you're struggling to repay your EMIs in the current situation. However, if your income channels are intact, you may continue investing strictly in line with your returns expectations, risk appetite, and liquidity requirements. Also, don't completely look away from FD owing to their recent low returns as capital protection has become as important as capital appreciation in the current scenario. 

If your investment horizon is more than 5 years and you are invested in top-rated equity mututal funds, you should ideally continue with your SIPs. If you're planning to start a new investment, you can consider investing in a diversified manner in top-rated mutual funds, FDs, Small saving schemes, an also in digital gold through Sovereign Gold Bonds. You may also want to evaluate your current risk tolerance in light of the volatility recently seen in investment markets.

While you prepare your contingency plans to tackle a prolonged pandemic situation, you should also review your financial health more frequently. This includes checking your credit score at least once a month and also reviewing your investment performance and initiating a portfolio re-balance if required. But your primary focus should be boosting your cash reserves, timely repayment of your debts, and maintaining adequate insurance cover to consolidate your finances in case of the ongoing crisis persists.