The massive second wave of the Coronavirus infection continues to spread across the length and breadth of the country. While it is unfortunate that so many lives were lost, following COVID-19 protocols and getting vaccinated remains the best defence for us as of now. The coronavirus is also having a toll on the financial position of many. Therefore, it is better to stay prepared for any financial exigency in these times. For the self-employed, the COVID-19 led lockdowns and other restrictive conditions had an impact on their livelihood. Even salaried individuals saw major pay-cuts and even job losses in 2020, impacting the flow of regular income.
The atmosphere of fear regarding one's finances and lifestyle is all pervasive. You can conserve your resources by avoiding all unnecessary expenses. Restrict your online shopping to necessities such as groceries. As far as possible, do not take fresh loans. Also ensure that your mutual fund SIPs continue as stopping them will deprive you of growth and wealth-creation opportunities. As a salaried or a self-employed individual, one needs to ensure that the financial situation does not deteriorate during these times. Here are a few key points to help you keep your finances immune from the impact of COVID-19.
Maintain emergency cash
A sudden medical emergency or a job-loss may impact your finances unless you have emergency funds, which will help you to avoid dipping into existing investments and savings. It is important that you have an emergency fund that is equal to at least six months of household expenditure ready. You may park your savings in short-term mutual fund schemes or liquid funds to meet this requirement, as they have the potential to provide high tax-efficient returns and yet provide liquidity to funds.
Find a second source of income
There have been pay cuts and job losses last year and any sudden loss of income could impact your long-term goals. It can also be better to keep the second source of income as a backup plan to tide over any temporary issue regarding your income stream. Such a second source of income can supplement your income when the situation stabilizes.
Review your investment portfolio
Use this opportunity of lockdowns and a work-from-home environment to review your existing investment portfolio. Talk to your financial advisor/planner to get rid of mutual fund schemes that are not performing and for adding the right consistently performing schemes. For long-term investors, any dips in the market can be used as an opportunity to deploy more funds. Also, look at the sectors and industries that are expected to do well in the post-pandemic world.
Follow asset allocation
It may also be the time to re-look at your asset allocation and decide the future course of action. Ideally, based on your risk profile and years to goals, your savings should be diversified across equity, debt and gold. For long term goals, equities remain the best asset class with a high potential to beat inflation over the long term. Your asset-allocation should not change as per the expectation of returns from various assets. Rather, your asset allocation should be based on your investment objective, risk appetite and the years left to achieve the financial goals. However, based on the actual performance, you may have to re-balance your portfolio to stick to the original asset-allocation plan to meet your long term goals.
The atmosphere of fear regarding one's finances and lifestyle is all pervasive. You can conserve your resources by avoiding all unnecessary expenses. Restrict your online shopping to necessities such as groceries. As far as possible, do not take fresh loans. Also ensure that your mutual fund SIPs continue as stopping them will deprive you of growth and wealth-creation opportunities. As a salaried or a self-employed individual, one needs to ensure that the financial situation does not deteriorate during these times. Here are a few key points to help you keep your finances immune from the impact of COVID-19.
Maintain emergency cash
A sudden medical emergency or a job-loss may impact your finances unless you have emergency funds, which will help you to avoid dipping into existing investments and savings. It is important that you have an emergency fund that is equal to at least six months of household expenditure ready. You may park your savings in short-term mutual fund schemes or liquid funds to meet this requirement, as they have the potential to provide high tax-efficient returns and yet provide liquidity to funds.
Find a second source of income
There have been pay cuts and job losses last year and any sudden loss of income could impact your long-term goals. It can also be better to keep the second source of income as a backup plan to tide over any temporary issue regarding your income stream. Such a second source of income can supplement your income when the situation stabilizes.
Review your investment portfolio
Use this opportunity of lockdowns and a work-from-home environment to review your existing investment portfolio. Talk to your financial advisor/planner to get rid of mutual fund schemes that are not performing and for adding the right consistently performing schemes. For long-term investors, any dips in the market can be used as an opportunity to deploy more funds. Also, look at the sectors and industries that are expected to do well in the post-pandemic world.
Follow asset allocation
It may also be the time to re-look at your asset allocation and decide the future course of action. Ideally, based on your risk profile and years to goals, your savings should be diversified across equity, debt and gold. For long term goals, equities remain the best asset class with a high potential to beat inflation over the long term. Your asset-allocation should not change as per the expectation of returns from various assets. Rather, your asset allocation should be based on your investment objective, risk appetite and the years left to achieve the financial goals. However, based on the actual performance, you may have to re-balance your portfolio to stick to the original asset-allocation plan to meet your long term goals.
Before selecting a mutual fund, it is crucial to identify your financial goal. Once you have identified your goals, you may select the appropriate mutual fund product in sync with your short or long-term financial goals.
Expense Ratio
The expense ratio is what a fund house charges its investors for various costs incurred for managing any mutual fund scheme. For example, one fund has an ER of 0.99%, which means that for every Rs 100 invested in this fund, you’ll have to pay Rs 0.99 to the fund house, and therefore, your final returns may be lower by that extent. You need to see your gains against the fund’s ER. It is built into the fund’s unit price, which is its NAV. There is also a difference between regular or direct plans of the same fund.
Tax Implication
Tax liability plays a significant role when you select a mutual fund product. The tax rate is based on the category of mutual fund and investment horizon. For example, an investment period of more than one year is considered long-term when you invest in equity mutual fund products. You have to stay invested for more than three years to come into the long-term investment category in a debt fund.
Funds to Invest
You should prefer such funds that fit your criteria, such as return consistency, management efficiency, performance against a benchmark, zero or minimal exit load, etc. For example, you may invest in a fund that has consistently performed better in the past, has a fund manager with a proven track record, has consistently outperformed its benchmark, and there is zero exit load after one year. That being said, past performance shouldn’t be the only deciding criterion as it cannot guarantee equal or better returns in the future.
Diversify Optimally
When selecting mutual funds, avoid putting all your money in a single asset category or a single mutual fund product. Try to diversify your portfolio by investing across different mutual fund categories and into different schemes within the same mutual fund category. Optimal diversification can help reduce the investment risk to a great extent.
Active vs. Passive Investment
In passive mutual fund investments, the fund manager follows the underlying index, and the fund’s return is usually in line with the returns offered by the underlying index. In an active mutual fund investment, the fund manager is directly involved in deciding the structure of the investment portfolio and the scrip’s that it consists of. The fund management cost and expense ratio are higher in an active mutual fund than a passive fund. So, if you are not looking for an aggressive return and merely intend to mimic the performance of an index such as Nifty or Sensex, you may choose a passive fund. But if you are looking to outperform the index and ready to take a little more risk, you may go for active investments.
Expense Ratio
The expense ratio is what a fund house charges its investors for various costs incurred for managing any mutual fund scheme. For example, one fund has an ER of 0.99%, which means that for every Rs 100 invested in this fund, you’ll have to pay Rs 0.99 to the fund house, and therefore, your final returns may be lower by that extent. You need to see your gains against the fund’s ER. It is built into the fund’s unit price, which is its NAV. There is also a difference between regular or direct plans of the same fund.
Tax Implication
Tax liability plays a significant role when you select a mutual fund product. The tax rate is based on the category of mutual fund and investment horizon. For example, an investment period of more than one year is considered long-term when you invest in equity mutual fund products. You have to stay invested for more than three years to come into the long-term investment category in a debt fund.
Funds to Invest
You should prefer such funds that fit your criteria, such as return consistency, management efficiency, performance against a benchmark, zero or minimal exit load, etc. For example, you may invest in a fund that has consistently performed better in the past, has a fund manager with a proven track record, has consistently outperformed its benchmark, and there is zero exit load after one year. That being said, past performance shouldn’t be the only deciding criterion as it cannot guarantee equal or better returns in the future.
Diversify Optimally
When selecting mutual funds, avoid putting all your money in a single asset category or a single mutual fund product. Try to diversify your portfolio by investing across different mutual fund categories and into different schemes within the same mutual fund category. Optimal diversification can help reduce the investment risk to a great extent.
Active vs. Passive Investment
In passive mutual fund investments, the fund manager follows the underlying index, and the fund’s return is usually in line with the returns offered by the underlying index. In an active mutual fund investment, the fund manager is directly involved in deciding the structure of the investment portfolio and the scrip’s that it consists of. The fund management cost and expense ratio are higher in an active mutual fund than a passive fund. So, if you are not looking for an aggressive return and merely intend to mimic the performance of an index such as Nifty or Sensex, you may choose a passive fund. But if you are looking to outperform the index and ready to take a little more risk, you may go for active investments.
A few months back, I came across this wonderful comparison between war-time and peace-time managers by Ben Horowitz, in his insightful book ‘The Hard Thing about Hard Things.’ The key point that Horowitz makes is that the skillsets required to lead companies through war-time are completely different from those needed during peace-time. And hence, what follows is that peace-time leaders are not necessarily the best leaders when companies find themselves suddenly in a war or a war-like situation.
This concept is quite intriguing and if we think about it. It is also applicable to our relationships and our money matters.
“Life is what happens to you when you are busy making other plans” – John Lennon.
This wonderful quote states in one line how most of us live our lives. While we make extensive plans for most eventualities, something suddenly happens and takes us by surprise and throws all our plans haywire. Take the last 12 months itself as an example. Who would have thought that a virus could throw the entire planet and literally every way of life as we knew it, so out of gear?
In a way, we live our lives largely assuming things are going to be peaceful and are usually well-prepared for peace-time events. We do make our plans and are prepared for some surprises, but it is when “war-time” strikes our lives that we suddenly find ourselves head under water and gasping for breath. Our plans were inadequate and we had never thought that something like this might even happen.
Learning from adversities
Such times are also the best for us to learn about our resilience, capabilities, strengths and weaknesses. They tell us about what to change within ourselves, hopefully before the next crisis hits.
-During “peaceful” times, we keep putting off making of plans and it is only during “war” times that you wish you had been better-prepared for the crisis, and promise yourself never to repeat the mistake. But it again goes to the back-burner once the crisis tides over, until the next problem strikes
-Even if you have a plan, it’s only during crises that you discover how good your plans were. Importantly, many times, you are prepared for crises A & B and but what actually happens is crisis C.
-Plans look good on paper during normal times, but operational hassles stand out when actual emergencies occur. We keep making and revising plans, without actually knowing how good the results would be during the actual need, because our plans never get “stress-tested.”
-The line between needs and wants is fuzzy during normal times. You make financial mistakes, but they don’t cost much, and you get repeat chances to make amends for your mistakes. But when crises suddenly strike, they can prove very costly, even life-threatening.
So how can one be financially prepared for the time when a “crisis” such as the present COVID-19 pandemic strikes?
War is a stress test on your plan
Every crisis is an opportunity; don’t let it go waste. Learn about what the weak points are in your finances and sort them out. Importantly, if you have an advisor, it is during crises that you discover how good (or bad) he or she is. Did you get proactive communication on how your portfolio is doing and what impact the crisis has on it? When you wanted to speak to your advisor, was he available easily and did you get a patient hearing? And finally, did the advisor proactively come back with the impact that this crisis has had on your financial plan? If the answer to any of this is no, your advisor is a “peace-time” advisor and not a “war-time” consigliore.
Wars help you determine your real needs
It is when crisis strikes that you discover what is truly essential for you, both financially and otherwise. And the wastages of the past also become clear as day. Use the learning to immediately make lasting changes to your money habits.
Wars give you a window to peep into the new future
At a personal level, your skillsets and your health are your biggest bulwarks against crises. Hence, always keep them sharp and well honed. Be on the lookout for danger signs and early warning signals; they can be live savers! So, what are some of the “war” situations that has struck your life and how prepared were you financially for the same? Importantly, while you may have prepared well do you know what to actually do when it happens? And do you also know how not to react in such situations? If you feel underprepared, it is time to go back to the drawing board and review your plans. And in case you have a financial advisor who is not an effective lieutenant during crises, now is when you should look for an immediate change.
This concept is quite intriguing and if we think about it. It is also applicable to our relationships and our money matters.
“Life is what happens to you when you are busy making other plans” – John Lennon.
This wonderful quote states in one line how most of us live our lives. While we make extensive plans for most eventualities, something suddenly happens and takes us by surprise and throws all our plans haywire. Take the last 12 months itself as an example. Who would have thought that a virus could throw the entire planet and literally every way of life as we knew it, so out of gear?
In a way, we live our lives largely assuming things are going to be peaceful and are usually well-prepared for peace-time events. We do make our plans and are prepared for some surprises, but it is when “war-time” strikes our lives that we suddenly find ourselves head under water and gasping for breath. Our plans were inadequate and we had never thought that something like this might even happen.
Learning from adversities
Such times are also the best for us to learn about our resilience, capabilities, strengths and weaknesses. They tell us about what to change within ourselves, hopefully before the next crisis hits.
-During “peaceful” times, we keep putting off making of plans and it is only during “war” times that you wish you had been better-prepared for the crisis, and promise yourself never to repeat the mistake. But it again goes to the back-burner once the crisis tides over, until the next problem strikes
-Even if you have a plan, it’s only during crises that you discover how good your plans were. Importantly, many times, you are prepared for crises A & B and but what actually happens is crisis C.
-Plans look good on paper during normal times, but operational hassles stand out when actual emergencies occur. We keep making and revising plans, without actually knowing how good the results would be during the actual need, because our plans never get “stress-tested.”
-The line between needs and wants is fuzzy during normal times. You make financial mistakes, but they don’t cost much, and you get repeat chances to make amends for your mistakes. But when crises suddenly strike, they can prove very costly, even life-threatening.
So how can one be financially prepared for the time when a “crisis” such as the present COVID-19 pandemic strikes?
War is a stress test on your plan
Every crisis is an opportunity; don’t let it go waste. Learn about what the weak points are in your finances and sort them out. Importantly, if you have an advisor, it is during crises that you discover how good (or bad) he or she is. Did you get proactive communication on how your portfolio is doing and what impact the crisis has on it? When you wanted to speak to your advisor, was he available easily and did you get a patient hearing? And finally, did the advisor proactively come back with the impact that this crisis has had on your financial plan? If the answer to any of this is no, your advisor is a “peace-time” advisor and not a “war-time” consigliore.
Wars help you determine your real needs
It is when crisis strikes that you discover what is truly essential for you, both financially and otherwise. And the wastages of the past also become clear as day. Use the learning to immediately make lasting changes to your money habits.
Wars give you a window to peep into the new future
At a personal level, your skillsets and your health are your biggest bulwarks against crises. Hence, always keep them sharp and well honed. Be on the lookout for danger signs and early warning signals; they can be live savers! So, what are some of the “war” situations that has struck your life and how prepared were you financially for the same? Importantly, while you may have prepared well do you know what to actually do when it happens? And do you also know how not to react in such situations? If you feel underprepared, it is time to go back to the drawing board and review your plans. And in case you have a financial advisor who is not an effective lieutenant during crises, now is when you should look for an immediate change.
Retirement planning is a very crucial decision in everyone’s life as one has to leave the workforce someday irrespective how energetic, young, or high spirited you are today. The golden rule of retirement planning is to start as early as you start earning. It is a planning for a new stage of life and this journey will become more empowering and comfortable if we have desired financial stability and financial freedom on retirement.
Power of compounding
A structured retirement planning starting at an early age will help unleash the power of compounding for a longer period of time, thus helping accumulate a bigger corpus. Planning for retirement is simply taking aside a part of your income during your earning years to provide for a passive source after you retire.
It is easier said than done, because keeping aside a part of income is one aspect and engaging this income in the right investment avenue for earning a future passive income and fulfilling the desired corpus requirement for different financial goals is another aspect. At different stages of life, different strategies of financial planning are required. In the initial stage of earning cycle, responsibilities are fewer and channelizing the earnings in the right direction is very essential and budgeting plays a very significant role at this stage.
The goal for retirement planning should also be initiated at this stage of earnings cycle. But if one has dependents at this stage, then life cover is also required especially when there is no life cover policy provided by the employers. A term insurance that provides required protection with effective cost may be considered.
Investment portfolio
Create a proper investment portfolio with a mix of variant investment products aligning with growth, income and liquidity requirement. Revise the portfolio regularly so that the planned corpus for different financial goals can be accumulated. If you have managed stage one and two prudently, then the third stage is a rewarding phase as at this stage most of your expenses are stabilised while the income is growing which ultimately results in more savings. At this stage many of the financial needs are also met by the passive income gained due to judicious investments made in stage one and two. The focus at this stage is on the retirement corpus. A large portion of the savings should be channelled towards retirement planning investments.
Power of compounding
A structured retirement planning starting at an early age will help unleash the power of compounding for a longer period of time, thus helping accumulate a bigger corpus. Planning for retirement is simply taking aside a part of your income during your earning years to provide for a passive source after you retire.
It is easier said than done, because keeping aside a part of income is one aspect and engaging this income in the right investment avenue for earning a future passive income and fulfilling the desired corpus requirement for different financial goals is another aspect. At different stages of life, different strategies of financial planning are required. In the initial stage of earning cycle, responsibilities are fewer and channelizing the earnings in the right direction is very essential and budgeting plays a very significant role at this stage.
The goal for retirement planning should also be initiated at this stage of earnings cycle. But if one has dependents at this stage, then life cover is also required especially when there is no life cover policy provided by the employers. A term insurance that provides required protection with effective cost may be considered.
Investment portfolio
Create a proper investment portfolio with a mix of variant investment products aligning with growth, income and liquidity requirement. Revise the portfolio regularly so that the planned corpus for different financial goals can be accumulated. If you have managed stage one and two prudently, then the third stage is a rewarding phase as at this stage most of your expenses are stabilised while the income is growing which ultimately results in more savings. At this stage many of the financial needs are also met by the passive income gained due to judicious investments made in stage one and two. The focus at this stage is on the retirement corpus. A large portion of the savings should be channelled towards retirement planning investments.