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 with the help of Financial advisor.
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.
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:
i. 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
ii. High liquidity for access during exigencies
iii. Attain financial goals across investment horizons
Unless there is a direct 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.
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