The Covid-19 pandemic is exacting not only a severe-toll on
individual well-being, but on economic health as well. The
pandemic has led to governments’ world over resorting to
lockdowns and enforcing social distancing to control its
spread. The transitioning to the ‘new normal’ has upended
businesses, jobs and incomes.
As the world adjusts, investors can take several proactive
steps to strengthen their financial planning to not only
tide over the current crisis, but also such future black
swan events. At its core, the strategy is of time-tested dos
and don’ts:
Have adequate insurance cover
The most crucial component of financial planning is adequate
life and health insurance cover. The one thing the pandemic
has shown is the perils of being complacent about insurance,
and ensuring adequate coverage. While life cover is
important to protect loved ones in case anything befalls
you, a heath cover for you and your family is imperative to
protect you from ballooning medical bills. Here, it is
important that you do not just restrict the insurance cover
to what is available from your employer (if provided), but
instead assess the optimum insurance cover (both life and
health) for yourself and your family, and buy additional
cover, if required.
Cut down on expenses
While the lockdown limited discretionary spending of
households because of limited availability of products and
services, it is important for you to rationalise your
expenses even as we enter a phased lifting of the lockdown,
at least till economic conditions improve. Here, it is
important that the weekly shopping basket is limited to the
essentials, as far as possible. And if non-essential
expenses need to be made, a list should be prepared and
prioritised, cutting out the least important ones.
Pro tip – Rationalisation of expenses will not only improve
your finances, but also be an eye-opener for the amount of
unnecessary expenditure that you have been doing. The
surplus can be used for more productive purposes, such as
investment planning.
Build an emergency corpus
You would have realised the benefit of having that emergency
fund that you had been building, which at some point of time
you though wasn’t required and used it on a discretionary
spend, such as buying a 55-inch smart TV.
As a thumb rule, your emergency fund should cover at least
3-6 months of all your expenses. If not done yet, then begin
now. Emergency funds can be built by parking money in
investment avenues that score high on liquidity and offer
safety of capital. As such, one can consider savings
accounts, bank fixed deposits and/or liquid funds.
Liquid funds do not offer assured returns, unlike bank fixed deposits,
but market-linked returns and also provide liquidity, which
is crucial in an emergency. Liquid funds are debt schemes
that invest in short-term fixed income and money market
instruments that have a tenor of 91 days or less – Treasury
bills, certificates of deposit and commercial papers.
Redemption proceeds are credited to the investor’s account
typically within 24 hours of placing a redemption request.
However, as mutual funds are subjected to market risk, a
detailed evaluation of your personal risk-return profile and
the scheme-related factors are musts before investing.
Pro tip – The benefit of having an emergency fund helps you
from falling in a debt trap during uncertain times, by
taking loans, or by pawning off gold or other assets. And
while individuals in the current situation can make use of
the Reserve Bank of India’s moratorium on loan repayment,
this does not reduce the overall loan amount. Instead, it
also adds up the interest for the moratorium period.
Build a secondary source of income
We hope that you have taking time during the lockdown to
upskill yourself. There are a myriad of online courses to
gain new expertise, and help make your profile stand out,
thus reducing the risk of job or income loss, or find new
employment, or assess a business venture. Additionally, you
could pursue a hobby, which could fructify into monetary
gains, thereby supplementing your income.
Summing up
While these are challenging times, it is important not to
react in haste. The financial planning decisions made today
will provide the bulwark for the long term. A judicious
investment plan has three key pillars:
-
Well-diversified across asset classes, such as equity,
debt and gold. Diversification helps mitigate risk, as
losses owing to a decline in one asset class can be
offset by gains in another. This has been proven
empirically recently, wherein gold prices rose and
debt provided stability to the portfolio buffeted by
volatility in equities
-
High liquidity for access during exigencies
-
Attain financial goals across investment horizons
Unless there is a dire need, it is important investors
continue their path of financial planning. In fact,
investors could find volatility in the equity market
an attractive opportunity, especially through
investment avenues such as systematic investment
plans; the current phase could help investors buy more
units, and reap the benefits over the long term.
Individuals in urgent need of funds could also
consider a partial redemption of their investment via
a systematic withdrawal plan.
As the situation with the pandemic unfolds, don’t
allow it to render you powerless. Stick to the tenets
of the dos and don’ts to emerge stronger.
Disclaimer:
Any comparison/data mentioned in this material is for
general information only and not intended to be relied upon
as investment advice and is not a recommendation, offer or
solicitation to buy or sell any securities or to adopt any
investment strategy. Information and content herein have
been provided by CRISIL Research, a Division of CRISIL
Limited, and is to be read from an investment awareness and
education perspective only. Recipient are advised to seek
independent professional advice before making any
investments. The views / content expressed herein do not
constitute the opinions of SBI Mutual Fund or recommendation
of any course of action to be followed by the reader. SBI
Mutual Fund / SBI Funds Management Private Limited is not
guaranteeing or promising or forecasting any returns.
Mutual Fund investments are subject to market risks, read
all scheme related documents carefully.
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