The impact of coronavirus pandemic on the economy could have long-term consequences. While the immediate ramifications are already being felt across the economic strata, the footprints of the pandemic may very well remain for years to come. It remains to be seen how resilient our economy is and how fast the recovery happens across the sectors.
A country’s economic situation is a cyclical outcome; however, resilience is what helps economies bounce back faster than expected. The resilience of a country is likely to be higher if some of the following factors are present:
There are some investment rules or tips that should be followed:
A great benefit of staying invested in good mutual funds is that the market will also identify these funds and ensure that there is sufficient cash flow to the fund manager to average out the price of the holdings. Therefore, in times of market correction, it is better to stay invested even if one does not invest fresh cash.
A country’s economic situation is a cyclical outcome; however, resilience is what helps economies bounce back faster than expected. The resilience of a country is likely to be higher if some of the following factors are present:
There are some investment rules or tips that should be followed:
- A bad investment in a bad economic situation is a dangerous combination and can be avoided by periodically getting your portfolio reviewed, irrespective of the economic situation.
- An asset allocation review should be done regularly. It is important to correct over allocation or under allocation. Depending on your case, your portfolio may require rebalancing and selling of excess units.
- Once your mutual fund portfolio has been reviewed and streamlined, it is necessary that you hold on to your investments, even if the economy is deteriorating. On the contrary, your portfolio should be rebalanced with other asset class positions and/ or averaged out with fresh funds.
A great benefit of staying invested in good mutual funds is that the market will also identify these funds and ensure that there is sufficient cash flow to the fund manager to average out the price of the holdings. Therefore, in times of market correction, it is better to stay invested even if one does not invest fresh cash.
The The interest in equities is soaring as the stock markets touch new highs. However, the big question remains whether young investors put money in stocks directly or through mutual funds. Here are some reasons why mutual funds hold a little edge over shares (stocks) in terms of investment subject to individual rationality.
Portfolio diversification
It reduces the risk of concentration in a particular stock as here the investment is made in various types of stocks, and such activity mitigates the losses if one or two stocks won’t work or incur losses. But in case of direct investment in stocks, one won’t invest in more than 10 stocks on an average, thereby entailing huge risks on his investment in case of volatility.
Professional management
Mutual funds are professionally managed by a team of fund managers who do a lot of research and study various stocks and then identify and pick up such select stocks that are more profitable or those that signify growth in near future. They study the financial statements and other necessary information about the companies, and are well-versed with the risk management process. On the other hand, investing in stocks means an individual will have to study the stock market himself, and analyse the headwinds and tailwinds of such stocks. That is the reason why the task of identifying, analysing and evaluating risks isn’t a beginner’s cup of tea.
Disciplined approach
A mutual fund follows a very systematic-cum-professional-cum-disciplined approach towards investing investors’ money, and then there are various types of funds here in the form of equity, debt, hybrid, gold, etc., with specific goals like retirement, children’s plans, etc. Depending upon your investment horizon, you can go for either liquid funds or corporate bond funds. You can also take the Systematic Investment Plan (SIP) route.
Tax benefits
There are benefits in the form of deductions available under Section 80C of Income Tax Act when investing in certain schemes in mutual funds, for e.g., Equity-Linked Saving Scheme wherein deduction of up to Rs 1.5 lakh per year is available. No such benefit is available in direct stock investment and one has to pay certain charges like STT, dividend distribution tax, capital gains tax, brokerage charges. In mutual funds, one has to pay fund management fees.
If an investor has time to study and research various stocks and its financial information, then he can create his own stock investment portfolio. But if we are not able to conduct adequate research or dedicate sufficient time in understanding and evaluating various stocks and their related news, and want our money to be looked after by fund managers professionally whose intent is to provide us a consistent return over a long term period specifically by investing in a diversified manner, then mutual fund is the best option for investing.
Portfolio diversification
It reduces the risk of concentration in a particular stock as here the investment is made in various types of stocks, and such activity mitigates the losses if one or two stocks won’t work or incur losses. But in case of direct investment in stocks, one won’t invest in more than 10 stocks on an average, thereby entailing huge risks on his investment in case of volatility.
Professional management
Mutual funds are professionally managed by a team of fund managers who do a lot of research and study various stocks and then identify and pick up such select stocks that are more profitable or those that signify growth in near future. They study the financial statements and other necessary information about the companies, and are well-versed with the risk management process. On the other hand, investing in stocks means an individual will have to study the stock market himself, and analyse the headwinds and tailwinds of such stocks. That is the reason why the task of identifying, analysing and evaluating risks isn’t a beginner’s cup of tea.
Disciplined approach
A mutual fund follows a very systematic-cum-professional-cum-disciplined approach towards investing investors’ money, and then there are various types of funds here in the form of equity, debt, hybrid, gold, etc., with specific goals like retirement, children’s plans, etc. Depending upon your investment horizon, you can go for either liquid funds or corporate bond funds. You can also take the Systematic Investment Plan (SIP) route.
Tax benefits
There are benefits in the form of deductions available under Section 80C of Income Tax Act when investing in certain schemes in mutual funds, for e.g., Equity-Linked Saving Scheme wherein deduction of up to Rs 1.5 lakh per year is available. No such benefit is available in direct stock investment and one has to pay certain charges like STT, dividend distribution tax, capital gains tax, brokerage charges. In mutual funds, one has to pay fund management fees.
If an investor has time to study and research various stocks and its financial information, then he can create his own stock investment portfolio. But if we are not able to conduct adequate research or dedicate sufficient time in understanding and evaluating various stocks and their related news, and want our money to be looked after by fund managers professionally whose intent is to provide us a consistent return over a long term period specifically by investing in a diversified manner, then mutual fund is the best option for investing.
The past year has seen job losses, job and internship offers being revoked, and in some cases, extreme exploitation of employees by companies and institutions. People are thankful to have jobs, and some have even settled for pay cuts to stay employed.
Many people had investment plans involving monthly investments into mutual funds (SIPs). There is a temptation to stop the SIPs and keep the cash in a savings account as preparation for emergencies. There is also a feeling that life is fleeting and thus, saving money for the future is futile, and statements like “life is short”, “you only live once”, and “carpe diem” (seize the day) rear their heads. There is no reason for us to let fear or fatalism dictate our lives. And I give below some financial and lifestyle steps that you can take at this time.
We have to believe in our resilience and that we will overcome this disaster. We owe it to ourselves and our families to manage the present and continue our pre-pandemic financial plans, to the extent possible.
Step 1: Securing the base
Health insurance: We need to have a health insurance plan for the family independent of our employers. We can no longer depend on our employers for covering our medical expenses. Ensure a separate health insurance plan to cover your family.
Emergency fund: Ideally, an emergency fund should be up to 12 months of expenses. Look at your outflow for 2019 and subtract any vacation spends. Add 10% to that amount which becomes your emergency fund requirement. Around 30% of this fund should be in a savings account or linked fixed deposits while the rest can be in liquid funds or fixed deposits.
Step 2: Career and self-care
Ensuring a cash flow: Ensure a cash flow by holding on to your current job or business. Don’t add to your stress by changing jobs or starting a new business unless you have no choice. If you are in a toxic workplace, endure until you get something better. Do not exit an established company for a startup.
Step 3: Make and execute your investment plan
After securing the base, the money left over should be directed towards your original financial plan. Here asset allocation is critical. Make sure you have sufficient allocation to equity, medium-term and long-term debt. Mutual funds and other securities
For equity, you can follow the formula of 100 minus age. Consider PPF, EPF, VPF as part of your long-term debt allocation. Use sovereign gold bonds to have an allocation to gold. A 30-year-old should invest 60-70% in equity, 20% in long term debt, 5-10% in medium-term debt and 5-10% in gold. Medium-term debt options include fixed deposits and debt mutual funds. And yes, you have to assume that you will live well past the age of 60. Avoid investments into real estate.
Curb spending and eschew loans
This is not the time to spend on unnecessary items. Buy mid-priced gadgets, if required. Restrict your spending on furniture and consumer durables to items that will impact your productivity. This is not the time to take new loans for frivolous reasons.
The new normal may be nothing like the old life that we took for granted. And this new normal may happen in a year or even a decade. Whatever the case, we have to remain optimistic and that has to reflect in our lifestyle choices and financial plans.
We have to believe in our resilience and that we will overcome this disaster. We owe it to ourselves and our families to manage the present and continue our pre-pandemic financial plans, to the extent possible.
Step 1: Securing the base
Health insurance: We need to have a health insurance plan for the family independent of our employers. We can no longer depend on our employers for covering our medical expenses. Ensure a separate health insurance plan to cover your family.
Emergency fund: Ideally, an emergency fund should be up to 12 months of expenses. Look at your outflow for 2019 and subtract any vacation spends. Add 10% to that amount which becomes your emergency fund requirement. Around 30% of this fund should be in a savings account or linked fixed deposits while the rest can be in liquid funds or fixed deposits.
Step 2: Career and self-care
Ensuring a cash flow: Ensure a cash flow by holding on to your current job or business. Don’t add to your stress by changing jobs or starting a new business unless you have no choice. If you are in a toxic workplace, endure until you get something better. Do not exit an established company for a startup.
Step 3: Make and execute your investment plan
After securing the base, the money left over should be directed towards your original financial plan. Here asset allocation is critical. Make sure you have sufficient allocation to equity, medium-term and long-term debt. Mutual funds and other securities
For equity, you can follow the formula of 100 minus age. Consider PPF, EPF, VPF as part of your long-term debt allocation. Use sovereign gold bonds to have an allocation to gold. A 30-year-old should invest 60-70% in equity, 20% in long term debt, 5-10% in medium-term debt and 5-10% in gold. Medium-term debt options include fixed deposits and debt mutual funds. And yes, you have to assume that you will live well past the age of 60. Avoid investments into real estate.
Curb spending and eschew loans
This is not the time to spend on unnecessary items. Buy mid-priced gadgets, if required. Restrict your spending on furniture and consumer durables to items that will impact your productivity. This is not the time to take new loans for frivolous reasons.
The new normal may be nothing like the old life that we took for granted. And this new normal may happen in a year or even a decade. Whatever the case, we have to remain optimistic and that has to reflect in our lifestyle choices and financial plans.
The sudden global spread of the pandemic has inflicted economic pain, leading to corporate salary cuts and even layoffs in some of the affected sectors. Uncertain times like these underline the importance of having an emergency fund and a financial plan in place to secure the future.
It is encouraging to see Indians becoming more aware of financial instruments. Still, for an average Indian, financial literacy is yet to become a priority.
While Indians have shown some inclination towards financial savings, most save on short-term instruments like bank deposits, which do not play a role in meeting life stage goals. And these goals are not merely markers of life stages, thinking of them proactively leads to long-term and disciplined savings, and thus, better financial outcomes.
How Does a Goal Help?
Most individuals have a ‘Spend first, Save later’ approach. Youngsters today, often at the start of their career, get burdened with credit card payments or EMIs for lifestyle goods. This leads to a negligible surplus towards investments. However, if you set your short-term and long-term financial goals, determine the amount you need to save for them, and stay committed to the plan, you can achieve these goals without burdening yourself and even end up richer in the process.
However, it is critical to ensure that the goals are realistic, have a specific time horizon, and keep in mind the current and future needs of you and your family.
Types of Financial Goals
There are two types of financial goals – short-term and long-term. Short-term goals usually have a shorter horizon of 3–5 years. These goals are more at an individual level such as buying a gadget, car, going on an international vacation, saving for higher education, planning a life event such as a marriage.
Long-term goals usually have a time horizon of over 5 years. These include buying a house, children’s education, children’s marriage, retirement planning. One may even want to leave behind an inheritance for their loved ones, which is also a long-term goal.
Instruments for Achieving Financial Goals
As a first step, you should ensure that your family is adequately protected with a Term insurance plan. It is a small expense that ensures that even if they were to lose you, they can continue pursuing their goals and aspirations without money becoming a problem. While I’ve mentioned this as the first step, it will rarely be so. Thinking of one’s own death isn’t a pleasant experience and hence people procrastinate. Yet, I cannot emphasise enough the importance of a Term plan, without which, it would be like walking down the streets of Mumbai on a July afternoon all dressed up, but without an umbrella handy.
Once you protect your family, you can evaluate the various financial savings and wealth creation instruments available like FDs, post office savings schemes, life insurance savings products, MFs, equities, PPF, EPF, NPS. While some of these offer tax benefits, it should not be the only reason to choose a particular instrument. Multiple factors like age, income, risk appetite and assets and liabilities should be considered while choosing an investment instrument.
If this begins to feel cumbersome, you can take the help of a financial planner or use tools and calculators that are freely available on financial websites. These help to better understand one’s risk appetite, short-term and long-term needs, thereby, enabling one to identify goals.
For achieving long-term financial goals, one needs to save and invest systematically, in a regular disciplined manner. The power of compounding plays a significant role in the process of wealth creation over the long term. Life insurance plans, NPS are well suited for such goals with a range of products that suit different risk appetites.
Conclusion
Outlining your financial goals enables you to get started in the right direction. With a disciplined approach, regular monitoring, and suitable asset allocation you can achieve them all.
It is encouraging to see Indians becoming more aware of financial instruments. Still, for an average Indian, financial literacy is yet to become a priority.
While Indians have shown some inclination towards financial savings, most save on short-term instruments like bank deposits, which do not play a role in meeting life stage goals. And these goals are not merely markers of life stages, thinking of them proactively leads to long-term and disciplined savings, and thus, better financial outcomes.
How Does a Goal Help?
Most individuals have a ‘Spend first, Save later’ approach. Youngsters today, often at the start of their career, get burdened with credit card payments or EMIs for lifestyle goods. This leads to a negligible surplus towards investments. However, if you set your short-term and long-term financial goals, determine the amount you need to save for them, and stay committed to the plan, you can achieve these goals without burdening yourself and even end up richer in the process.
However, it is critical to ensure that the goals are realistic, have a specific time horizon, and keep in mind the current and future needs of you and your family.
Types of Financial Goals
There are two types of financial goals – short-term and long-term. Short-term goals usually have a shorter horizon of 3–5 years. These goals are more at an individual level such as buying a gadget, car, going on an international vacation, saving for higher education, planning a life event such as a marriage.
Long-term goals usually have a time horizon of over 5 years. These include buying a house, children’s education, children’s marriage, retirement planning. One may even want to leave behind an inheritance for their loved ones, which is also a long-term goal.
Instruments for Achieving Financial Goals
As a first step, you should ensure that your family is adequately protected with a Term insurance plan. It is a small expense that ensures that even if they were to lose you, they can continue pursuing their goals and aspirations without money becoming a problem. While I’ve mentioned this as the first step, it will rarely be so. Thinking of one’s own death isn’t a pleasant experience and hence people procrastinate. Yet, I cannot emphasise enough the importance of a Term plan, without which, it would be like walking down the streets of Mumbai on a July afternoon all dressed up, but without an umbrella handy.
Once you protect your family, you can evaluate the various financial savings and wealth creation instruments available like FDs, post office savings schemes, life insurance savings products, MFs, equities, PPF, EPF, NPS. While some of these offer tax benefits, it should not be the only reason to choose a particular instrument. Multiple factors like age, income, risk appetite and assets and liabilities should be considered while choosing an investment instrument.
If this begins to feel cumbersome, you can take the help of a financial planner or use tools and calculators that are freely available on financial websites. These help to better understand one’s risk appetite, short-term and long-term needs, thereby, enabling one to identify goals.
For achieving long-term financial goals, one needs to save and invest systematically, in a regular disciplined manner. The power of compounding plays a significant role in the process of wealth creation over the long term. Life insurance plans, NPS are well suited for such goals with a range of products that suit different risk appetites.
Conclusion
Outlining your financial goals enables you to get started in the right direction. With a disciplined approach, regular monitoring, and suitable asset allocation you can achieve them all.