Topic 2: What personal finance lessons can we learn from COVID 19 pandemic
Have an emergency fund
One of the fall-outs of any big financial crisis is to deal with sudden risks e.g. job loss, loss of income in business, unexpected large expenses, etc. Even if these risks do not materialize, the prospect of having to face these risks is a frightening one for most middle income households. The very purpose of an emergency fund is to enable you to face these risks without having to liquidate your long term assets. Financial planners recommend that you should have an emergency fund that can meet 6 to 12 months of your regular monthly expenses, should you face a sudden exigency. Debt mutual fund schemes like overnight funds, liquid funds and ultra-short duration funds are suitable instruments for parking your emergency funds.
Invest in financial assets
Physical assets like land, real estate, gold jewellery, etc. still hold a lot of allure for average Indian households. Though the proportion of physical assets in average household savings have come down over the last 10 years (source: RBI), many Indian households have a large percentage of their net worth still invested in physical assets. Physical assets can be very difficult to liquidate during a major crisis and can often lead to distress sale in extreme situations. Further, sale of physical assets often require physical interactions and a lot of time to complete. Financial assets, on the other hand, are much more liquid. Most financial transactions can be carried out online. The COVID-19 crisis has shown that financial assets are much more useful in extreme situations.
Do not panic
Volatility can be very stressful emotionally. No one likes to see investments made with their hard earned money go down. Volatility can be extreme as we saw during the first wave of COVID-19 pandemic and before that during the Global Financial Crisis of 2008. But if you panic and sell, you will make a permanent loss. Being patient is of utmost importance during a crisis. Asset allocation is your best friend in uncertain conditions
There is low or even negative correlation between performances of different asset classes in different market conditions. Diversifying across different asset classes limit downside risk and provides stability to your portfolio across investment cycles.
Conclusion
COVID-19 has been one of the worst crises that we have seen in our lifetimes. This is not going to be the last crisis that we will ever face. But lessons learnt from this crisis will help us be better prepared to face future crises and emerge stronger from it. The lessons learnt from this crisis are certainly not new, since we have discussed these in our blog several times over the last few years, but a crisis of the magnitude of COVID-19 tells us, how important these basic lessons are. You can also discuss with your financial advisor how to be better prepared for the future.
One of the fall-outs of any big financial crisis is to deal with sudden risks e.g. job loss, loss of income in business, unexpected large expenses, etc. Even if these risks do not materialize, the prospect of having to face these risks is a frightening one for most middle income households. The very purpose of an emergency fund is to enable you to face these risks without having to liquidate your long term assets. Financial planners recommend that you should have an emergency fund that can meet 6 to 12 months of your regular monthly expenses, should you face a sudden exigency. Debt mutual fund schemes like overnight funds, liquid funds and ultra-short duration funds are suitable instruments for parking your emergency funds.
Invest in financial assets
Physical assets like land, real estate, gold jewellery, etc. still hold a lot of allure for average Indian households. Though the proportion of physical assets in average household savings have come down over the last 10 years (source: RBI), many Indian households have a large percentage of their net worth still invested in physical assets. Physical assets can be very difficult to liquidate during a major crisis and can often lead to distress sale in extreme situations. Further, sale of physical assets often require physical interactions and a lot of time to complete. Financial assets, on the other hand, are much more liquid. Most financial transactions can be carried out online. The COVID-19 crisis has shown that financial assets are much more useful in extreme situations.
Do not panic
Volatility can be very stressful emotionally. No one likes to see investments made with their hard earned money go down. Volatility can be extreme as we saw during the first wave of COVID-19 pandemic and before that during the Global Financial Crisis of 2008. But if you panic and sell, you will make a permanent loss. Being patient is of utmost importance during a crisis. Asset allocation is your best friend in uncertain conditions
There is low or even negative correlation between performances of different asset classes in different market conditions. Diversifying across different asset classes limit downside risk and provides stability to your portfolio across investment cycles.
Conclusion
COVID-19 has been one of the worst crises that we have seen in our lifetimes. This is not going to be the last crisis that we will ever face. But lessons learnt from this crisis will help us be better prepared to face future crises and emerge stronger from it. The lessons learnt from this crisis are certainly not new, since we have discussed these in our blog several times over the last few years, but a crisis of the magnitude of COVID-19 tells us, how important these basic lessons are. You can also discuss with your financial advisor how to be better prepared for the future.