A Five-Step Approach To Financial Planning During the Coronavirus Crisis
Here is a simple yet effective guide for surviving through the coronavirus crisis and coming out stronger through systematic and well-thought investments and savings
Coronavirus has shaken the world economy in the last six months and is likely to change forever the way we work, earn, spend, and the ways we invest as well. Coronavirus, which has transpired to be a health and an economic crisis, is something which most of us have not experienced before. It has drastically impacted the livelihood of millions of people in India and globally resulting in job loss, recession, displacement, the downfall of various sectors, among others.
Over the last few weeks, we have been receiving queries on how to manage investments during this crisis. Here is a simple yet effective guide for surviving through the coronavirus crisis and coming out stronger through systematic and well-thought investments and savings.
Emergency corpus is like a peace of mind corpus—that helps in being financially-secure during contingencies. Its importance can easily be understood in the current situation, but an emergency corpus is a must have at all times. We must assess the needs individually and be careful in saving the emergency corpus. Before planning long-term investments, it is advisable to accumulate an emergency corpus equivalent to at least six to nine months of expenses, including equated monthly instalments (EMIs). One-month equivalent to being maintained in the bank savings account and the remaining should be parked in a low-duration fund.
Tip: If you happen to use the emergency corpus for any requirement, you need to look to build it back again.
Medical insurance & term insurance
With rising hospital expenses and an uncertain job environment, it is necessary to have a personal medical insurance policy in addition to the company cover. Having a good insurance policy will save from draining out financial savings completely during a health crisis. We recommend an INR 7-10 lakh family floater health insurance as a minimum. Also, an online low-cost term policy is a must-have for all earning members to provide a financial backup for dependents. The cover should be 10-12 times of annual income. However, it also depends on the liabilities and the number of dependents that an individual has. It is essential to know the benefits and details of the policy before investing in an insurance policy.
Tip: Both mediclaim and term insurance depends on family size and other personal requirements, and hence should be reviewed once every three years.
Rupee-based investments—Indian Equity and Fixed Income
For a long-term portfolio, you need to have a good mix of diversified equity funds and a portfolio of bond funds. Equity is always viewed as a volatile asset class, but has proven that for long-term goals, it is the best asset class, so we should start investing via systematic investment plan (SIP) and periodically look at increasing investments. To add stability to the portfolio, fixed income is a good addition in the portfolio. With falling interest rates, bond funds make for a more attractive and tax-efficient investment avenue compared to bank fixed deposits (FDs). In addition to these a PPF and a NPS account is something which everyone should look at having, which helps in building a discipline of a 15-30 year investment horizon.
Tip: While looking at an Equity allocation, think long term and view market falls as an opportunity to adding investments.
Dollar-based investments—Gold and International Equity
The rupee has shown a steady depreciation against the US dollar over the last many years. This gives us an advantageous opportunity to invest in dollar-denominated assets, which can provide additional returns due to the rupee depreciation.
Gold has been a favourite need-based investment for Indians. Now, with options such as gold funds, gold exchange-traded funds (ETFs) and sovereign gold bonds, it is even more attractive. The outlook for gold over the next couple of years looks favourable even from the current elevated levels and gold can act as a good hedge in the portfolio. It can form up to 5 per cent of the portfolio.
Additionally, global equity funds are a good opportunity to diversify one's portfolio by investing in other markets other than remaining invested only in Indian markets. Diversification and getting an opportunity to make investments in a portfolio of companies which one is already using daily such as Amazon, Facebook, Google, Netflix, and Microsoft, among others. Before investing in global equity funds, it is advisable to understand your specific requirements and investment horizon, and then make the decision.
Tip: Look at global equity as a long-term diversification rather than an absolute return product.
Investing with a goal in mind is a sure-shot way to achieve the goals. To begin with a goal in mind helps staying focused and also motivates you to work towards the goal. Quantifying goals such as retirement corpus, children's education corpus helps you introspect and also acts as a deterrent from dipping into the corpus for any other requirements. We recommend that based on the nature and tenure of the goals, an appropriate asset allocation can be worked out to help optimize the returns as well. Periodic review and rebalancing helps to stay focused on the goals and accumulate a sufficient corpus.
Tip: Goal-based investing is very helpful, to motivate yourself also add a couple of short term goals which will motivate you like a vacation corpus or some other activity that you are passionate about.