Invest Better by Reading the Market Better: Financial Trends to Watch Out For

We will first examine the evolving behavioral changes of consumers and investors and the impact these changes will have on financial markets, particularly the stock markets in 2022.

Personalized Customer Expectations

Customers' expectations regarding ‘experience’ are not only rising but also becoming more personal. The companies no longer use the standardized experience benchmarks they employed earlier. 

Rolling out a standard customer experience package across customers does not work today; they have to customize it to satisfy each customer - B2B or B2C - depending on varied parameters like demography, region, language, income, education, etc. The incumbent customers expect products, services, and after-sales support to satisfy their tastes and expectations. 

Social commerce has emerged as a considerable force as it connects with customers in a more personalized way. Companies that understand this change can leverage multiple channels to satisfy customers, which can help reduce customer acquisition cost (CAC), increase sales conversion, churn, and repeat rate, and eventually achieve a higher Lifetime Value (LTV). 

Financial Literacy of Investors

Retail investors, primarily millennials, who entered the market in the last two years, have had a good run. However, as per a RBI report, a survey conducted in 2019 revealed that 27.18% of the respondents had achieved minimum target score or minimum threshold score in each of the components of financial literacy prescribed by OECD International Network on Financial Education (OECD-INFE). This implies 62.82% of respondents lack financial literacy (which probably includes a large number of investors). 

This leads to an inference that many investors did make money in the market last year because of the bull run or advice from social media influencers. But, it will be a different scenario in 2022, a year when they should be far more cautious, and must upgrade their investing skills by taking a course like Secrets of Winning the Stock Market by elearnmarkets for strengthening the fundamental analysis.

The ongoing year may not be as smooth as 2021 for the markets, and there is a significant probability that the new investors may lose money or withdraw from the market.

Startup Fundamentals

We saw many startups turning into unicorns last year, making India home to 85 unicorns with a total valuation of $287.89 billion as of January 28, 2022. There is no doubt that startups with good fundamentals, unit economics, and a strong moat will not find it challenging to get funding in 2022. 

Central banks worldwide are tightening their monetary policy; however, investors will be ready to take risks in 2022 with scalable business models which have solid fundamentals. Moreover, the entry of new angel investors and venture funds, along with the fact that 62 startups were funded in 2021, reveals a promising outlook on fundraising. 

In a nutshell, customer and investor behavior will substantially influence business growth, profitability, and investing in 2022. Let us now take a closer look at the strategies that investors, particularly retail investors, can leverage to make their investment less risky and more money-making. 

The markets are likely to be volatile in 2022 due to the undergoing corrections and various other economic factors such as rising inflation, supply chain not being able to meet the demand, the intervention of central banks, etc. 

This is part of the market dynamics, and an investor needs to play it well. The most critical step you should take towards making your investment safe and income-generating is a well-planned diversification of your investment portfolio. To learn the concept, you can enrol in Skillshare's course on Stock Market Investing Masterclass.

The year 2021 was beneficial in a major way for equity investors, as can be inferred from the way the 30-share benchmark Sensex breached 50,000 and 60,000 levels after the pandemic-triggered market crash in March 2020. There will be many more Initial Public Offerings (IPOs) in 2022 to boost the market, with the big listing of state-owned LIC and many other companies in the pipeline.

Sensex gained 10,055.16 points or 21.05% till December 29 last year, and the index has reached an all-time high of 62,245.43 points on October 19. Though banking and auto sectors performed below potential in 2021, they are expected to do well along with the already well-performing IT, telecom, capital goods, cement, and real estate sectors. 

The Power of Diversification

In 2022, markets will be on correction after being bullish, and you should be careful while making new investments and managing your existing investments. 

One of the most popular and effective investing strategies is to build a diversified portfolio across different asset classes that match your investment profile. With a diversified portfolio, even when the market falls, your volatile investments may also fail, but the overall performance of your portfolio will be balanced. 

That is because a balanced portfolio is constructed with a blend of asset classes and products that complement each other so that low-risk assets balance high-risk investments. 

A diversified portfolio of balancing assets helps you smoothen out your risks and returns in volatile times. The portfolios comprise investments with varying weightage between cyclical and non-cyclical stocks. 

Your portfolio's overall returns are the weighted average returns of all the investments included in the portfolio. A portfolio supported by sound research and advisory can help you create a model portfolio. Consider the following factors while making your portfolio:

• Sector Diversification: This is the method of diversifying portfolios among various cyclical sectors like banking and finance, auto, metals, infrastructure, and real estate and non-cyclical sectors such as IT, pharma, FMCG, and consumer goods.
• Market Cap Diversification: Another aspect that needs to be factored in a while building a model portfolio is spreading investments based on Market Capitalisation.
  • While large-cap stocks are typically stable with moderate returns, mid-cap and small-cap stocks are more volatile and risky and generate higher returns. This helps market-cap-based diversification, a crucial strategy to bring balance to your portfolio.
• Portfolio Rebalancing: This is a process of booking profit on outperforming stocks and investing in underperforming stocks that have the potential to perform well in the future.
• Decluttering your investments- reviewing portfolios and removing underperforming investments from portfolios - is also a part of this diversification strategy.

While a portfolio has various asset classes, a stock basket consists of different stocks - either you create your basket or select a predefined basket made by industry professionals. The hype created on the social media market, advice received from your friends or relatives investing in shares, etc., can influence your investing decisions. 

That is not the right strategy to adopt for investing. Instead, look at investment in baskets. A basket is built with a set of stocks - typically ranging from 5 to 25 - based on a particular investment strategy or theme that can be traded in a single order. 

You can select baskets curated by investment professionals or create your own. The significant difference between a basket and a mutual fund is that you have complete control over the basket, whereas the control on investment in the mutual fund is with the fund manager. 

We will take a look at a few baskets that can be curated based on various risk-return profiles:

• Low Risk: Multi-asset Basket: This is meant for low-risk appetite profiles and is constructed with a basket of equity, debt, and ETFs, which helps investors earn slow and steady returns to meet long-term financial goals.
• Medium Risk: Diversified Sector: Sectors perform variedly at different times of market conditions. Sometimes pharma may do well, sometimes auto, and at other times real estate. Baskets allow you to dynamically rearrange the weight of stocks to help you achieve high performance.

You might be wondering how to invest in stocks of global brands like Google, Pepsi, Apple, Zoho, or Nike. Investing in global markets is a good diversification strategy and offers you opportunities to participate in the international markets. 

The most common route is the Liberalised Remittance Scheme (LRS) route that allows you to make international investments in assets like shares, mutual funds, exchange-traded funds (ETFs), etc. Authorized dealers, as per RBI guidelines, handle remittances against such transactions.

Corporate Fixed Deposits are term deposits offered by corporate companies and NBFCs, which offer higher interest rates than the term fixed deposits with banks. Corporate FDs are low-risk, medium-return investments as rating agencies periodically rate them to review the risk and financial stability of the FD issuer. 

Corporate FDs help diversify your portfolio with the weight of debt investments. They have a low minimum investment value and can be done through SIP or lumpsum mode. Another advantage of Corporate FD is that there are no lock-in periods, and investors can withdraw funds as per their financial goals.