This financial crisis could be a blessing in disguise

The disruption caused by the pandemic has turned things upside down but every ‘Covid’ has a silver lining

Raj Khosla
Updated: Jul 30, 2020 04:09:07 PM UTC
Image: Shutterstock

As Covid-19 spreads across the country, there's no stopping the flow of bad news on the financial front. The pandemic has ravaged the financial landscape. GDP growth has inverted, corporate earnings are down, the job market is moribund and inflation is poised to shoot up. However, there is a silver lining amidst this gloom. Though the past four months have been very difficult for investors, the Covid-induced financial crisis has also led to certain positive developments.

For instance, news reports about the astronomical hospital bills of Covid-19 patients has made individuals, especially millennials, realise the need for protection against medical expenses. Medical insurance is no longer seen as an unnecessary expense but is now being considered an absolute essential. A survey conducted by a health insurance company shows that before the outbreak, only 37 percent of millennials were interested in buying a medical insurance plan. However, post-Covid, 60 percent were keen to buy a comprehensive cover. Covid has even nudged individuals to look at their health plans more closely. Earlier, only 50 percent of buyers showed any interest but now 58 percent want to fully internalise the features and coverage of the plans they purchase.

Similarly, the Covid-19 scare has made us realise the fragility of life and is pushing us to learn more about life insurance and to then buy sufficient cover. A survey by a life insurance company shows heightened anxieties relating to unemployment and untimely death of the family breadwinner. For many individuals, the focus has shifted from returns to whether an insurance policy can cushion the impact of mortality. This is a welcome attitudinal change that will help individuals make the right choices when it comes to buying insurance. The survey shows that pure protection term insurance, which has often been dismissed as a waste of money because the buyer gets nothing if he survives, has emerged as a preferred life insurance category during Covid-19.

Apart from stressing on caution and safety, individuals are also learning to live within their means. Even before Covid hit India, household spending and borrowing were on the decline. RBI data on household savings released last month shows that consumers are cutting back on expenditure and relying less on borrowings. The borrowings by households were down even as net financial savings of Indian households rose almost 14 percent to Rs 15.62 lakh crore in 2019-20.

It is obvious that households tend to save more during a slowdown and income uncertainty. The pandemic has changed the attitudes towards spending and saving. The survey by the life insurance company shows that the reasons for saving have changed. Young people used to ask for the best loans for cars and holidays. They are now seeking advice on where to park emergency funds. People are now saving for medical treatment and for other emergencies like job loss or closure of business. Vacations, vehicles and luxury expenses are way down in the list of priorities.

It is also interesting to note that equity investors have become more mature as is evident from the net inflows into equity mutual funds after the outbreak of Covid. The fickleness of retail investors and the panic they demonstrate during market downturns is well known and widely documented. On previous occasions, whenever markets have tanked, we have observed that retail investors, especially mutual fund investors, stop investing and withdraw from the market even if that means turning their notional losses into permanent ones.

This year was no different. Data from the Association of Mutual Funds in India shows that when the markets crashed, the redemptions from equity funds rose from an average of Rs 14,000 crore a month to more than Rs 18,000 crore in March. Purchases also dropped from about Rs 20,000-25,000 crore to less than Rs 15,000 crore in April.

But it is heartening to see that, even in Covid times, SIP investments in equity funds have remained largely unaffected. The monthly SIP inflows slipped barely 8 percent from about Rs 8,500 crore per month before Covid-19 to Rs 7,927 crore in June. Investors have begun to understand the advantages of regular investing. They also seem to realise that it is not a good idea to terminate SIPs during a downturn. The redemptions also dipped sharply after March as investors preferred to not act in a knee jerk manner. There appears to be an understanding that markets were oversold in March and April, and that if they withdrew at the oversold levels, they would miss out once the markets bounced back. The current rally has proved them right.

Though markets have rebounded, not all stocks are back to their pre-Covid levels. Many momentum stocks and overhyped companies are still floundering 40-50 percent below their February levels. One reason for this could be that investors have learnt their lesson from the March crash and are now staying away from dubious scrips. They have understood how to distinguish between junk and value and are now happily focusing on the latter.

Nothing is forever, good times are indeed around the corner. Meanwhile, the current turbulence has perforce focused our collective attention on some very useful learnings.

The writer is a managing director of MyMoneyMantra

The thoughts and opinions shared here are of the author.

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