Economic Slowdown: Take These 5 Steps To Safeguard Your Finances
Secure an emergency fund and protect your job to come out of the ongoing slowdown unscathed
It is obvious that all is not well with the economy when two of the country's leading biscuit makers say demand for their humble products has shrunk. Fall in private consumption, liquidity crunch, job losses across industries and the lowest GDP growth rate of 5 per cent in the last six years—these are pain points showing a slowdown in the Indian economy. If the GDP growth rate continues to decline further, the government's ambitious goal of becoming a $5 trillion economy by 2025 will remain out of reach.
But how does an economic slowdown affect you? First, a slowdown puts jobs in danger as companies downsize their workforce to cut costs. Even if you don't lose job, you might face a salary cut or are likely to be rewarded with thin to no increment, which means you will be poorer than the previous year on account of raise less than the inflation rate. Second, if you are invested in the stock market, you must already be feeling the heat with the market going into a tailspin.
While you have little control over the economy or market, you can curtail spending and control emotions from influencing investment decisions. Here's what you can do to safeguard your finances in these testing times:
Cut down spending and repay debt
Review your spending and saving pattern during such uncertain times to find scope to save money. One easy way is to cut down on discretionary spending. You can save 15-20 per cent more per month by eating out or ordering less, unsubscribing OTT platform memberships and resisting the urge to shop.
Trim down credit card usage, even for utilities. If you have any outstanding credit card bills or EMIs, make it a priority to repay them to contain the loss on account of interest outgo. "Credit card interest can balloon up to 40 per cent in a year if you carry forward the balance," says Prateek Mehta, CEO and co-founder of online advisory platform, Upwardly.in. Personal loans should be avoided completely as they charge a whopping 20-24 per cent interest per annum.
Don't stop investing
A common, and definitely the worst, practice during a market downturn is to exit under panic. Investor worries are justified as many of those who started investing in equity mutual funds in the past 15-18 months are sitting on losses. Even five-year annualised returns of large-cap funds have fallen to about 7.5 per cent, which is close to bond yields. But stopping SIPs when markets tank will do more harm than good. "SIPs help in reducing average cost of acquisition and remove the need for timing the market," says Raj Khosla, founder and MD, MyMoneyMantra.com. "Investors buy more units when the market is down. By exiting, they will lose the opportunity to accumulate more."
Historically, every market downturn is followed by a rebound which is when investments gain. "Market volatility does not mean actual loss. SIPs give best returns when you stay invested across market cycles," says Rohit Shah, founder and CEO, Getting You Rich.
In fact, market experts see silver lining for long-term investors. "Investors with a holding period of over seven years and high risk appetite can invest in small and mid-cap funds as they are currently available at discounted prices," says Tarun Birani, founder and CEO of TBNG Capital Advisor. However, a word of caution here as an investment strategy should be goal-based and not as per market conditions. "Jumping in with a lump sum just because the market is down is akin to getting admitted in a newly opened hospital because it is offering discounts. One should stick to long-term asset allocation," cautions Shah.
Review your portfolio
Taking stock of your investment portfolio at least once in a year is crucial, but in a rough market amidst a slowdown, it is prudent. First, re-balance your asset allocation depending on the horizon of different goals. If the goal you have been investing for is just one to two years away, shift the accumulated corpus to safer liquid funds or fixed deposits. "Investor can shift from equity funds into liquid funds via systematic withdrawal plan (SWP). This will ensure no tax outgo on gains," says Khosla. Equity is volatile and can wipe a portion of accumulated corpus during a market downturn, so the focus should shift to capital protection. However, if the investment horizon is above five years, stay invested. "Investors in mid- and large-cap funds should continue, or even top up their SIPs, if possible. These segments will grow multifold once the current cycle turns bullish," says Vishal Wagh, head of research, Bonanza Portfolio.
Second, let go of dud real estate investments and insurance products to save on the premium outgo.
Third, Shah points out that a slow growth market is a reminder of why investors should diversify beyond India. "Just how it is important to diversify across debt and equity to balance volatility, some exposure in foreign equity will protect your portfolio from turbulence in the domestic market," he says. Most mutual fund investment companies provide this option under the category of fund-of-funds (FoF). "One can allocate 5-30 per cent of the portfolio, depending on his risk appetite and goal horizon, in a US-focused FoF," Shah adds.
Create an emergency corpus
In the present gloomy job market, saving up an emergency fund is imperative, if you already don't have one. Unexpected expenses, like a car breakdown or sudden hospitilisation when you are already in a tight corner will land you in a soup if you don't have a separate fund marked for contingencies. The thumb rule is that the fund should be equal to at least six months' of your expenses, including EMIs. If you are a single income household, you may want to increase it to eight to ten month's worth of expenses. Instead of storing this amount in your saving account, park it in a liquid fund or a recurring deposit so that it is out of sight but at the same time accessible to you at a short notice.
Protect your job
As per Society of Indian Automobiles Manufacturers (SIAM), about 10 lakh jobs have been hit in the auto sector and auto component manufacturing industry. IT, media, FMCG, consumer services and hospitality are some of the other sectors where jobs are vanishing. Be aware of what is happening with your company and industry to know if your position is in danger. If the financial prospects of your company are looking iffy, start building a strong resume and connecting with your former colleagues to be ready for your next job hunt in case you get pink-slipped.
Even if your job is not in immediate danger, you should take a cue from the current scenario for future and re-skill accordingly. Moreover, artificial intelligence (AI), robotics and automation are already eliminating jobs across various industries. Zomato is the most recent example. The company laid off 540 employees from its customer support team last week saying that these jobs will be automated. "With the double whammy of an economic slowdown and an age of rapid technology led disruption, one's work skills have a limited life. The only recourse is to constantly upskill to remain relevant and valuable," says Devashish Chakravarty, Founder and CEO, QuezX.com, an online recruitment aggregator. Check job sites to understand the skill set relevant to your sector that you need to upscale to. You can take online courses, short classroom programs or training programs offered by your employers to improve your skill set.