How to Stay Financially Fit In the COVID-19 Lockdown
Listen to How to Stay Financially Fit In the COVID-19 Lockdown
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As vaccine for COVID-19 seems like a distant dream people are trying their best in their own way to keep themselves fit and avoid contracting the dreadful disease. From avoiding restaurant food, to practicing yoga/exercise and opting for traditional remedies everyone is taking extra care to be fit.
Along with personal fitness, this difficult time demands that you have a relook at the way you have been managing your hard-earned money and make changes if necessary to keep yourself financially fit.
Since pandemic has lead to many firms announcing pay cuts, deferred payments or layoffs, the threat to personal finance cannot be ignored.
If the pandemic has made difficult for you to manage your assets here are simple ways through which you can achieve financial stability. Doing so will help you tide over negative market sentiments, earn a reasonable rate of return, and counter inflation without denting a hole on your future aspirations.
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Create a safety net
The importance of preserving cash as a safety net has never been so obvious such as during the time of crisis. Cash comes in handy while dealing with unexpected expenses arising due to job loss, pay cuts, medical emergencies, etc.
Therefore, it is important to hold at least 6 to 12 months' worth of expenses, including EMIs, in the form of cash. This contingency reserve can be parked in liquid avenues such as a saving bank account, and liquid/overnight funds.
As everyone is confined to their homes, discretionary spends has taken a backseat. The money thus saved can be used to build your contingency reserve.
That said, avoid holding excess cash than necessary as it will not help you counter inflation, whereas you may also lose out on attractive investment opportunity.
[Read: How to Optimally Manage Cash in Times of COVID-19]
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Expand your investment basket
A healthy portfolio is the one that takes calculated exposure across different asset classes so that if one asset class fails to generate lucrative returns other asset classes can protect your portfolio from financial loss. Allocate your assets across different avenues such as equity, debt and gold to minimize the investment risk.
The weightage to different asset classes should be based on your age, income & expenses, liabilities, future goals and aspirations, and the time horizon to goal to avoid taking undue risk.
Steps to diversify investment portfolio:
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For the equity part of your portfolio invest in a well-managed mutual fund and prefer the 'Core & Satellite' approach to diversify your investment across various categories of fund. The `Core' part can consist of large-cap fund, multi-cap fund, and value style fund and should form 60% of your portfolio holdings. Whereas, the `Satellite' part of your portfolio should include a mid-cap fund, large & mid-cap fund, and an aggressive hybrid fund.
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For the debt part of your portfolio, it has now become vital to exercise extra caution while picking schemes due to the recent spate of defaults and rating downgrades. It would be preferable to avoid schemes that have high exposure to private issuers and low-rated securities.
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Gold has a negative correlation with other assets and therefore, it acts as good portfolio hedge. It would be sensible to allocate 10-15% of your portfolio to gold - preferably via Gold ETFs and/or Gold Savings Funds with a long-term view.
[Read: Make Mindful Choices of Mutual Fund investments in Current times]
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Think long term
The market crash has made many investors nervous about their investment. But the uncertainty should not make you redeem your healthy portfolio - you may regret it later. Stopping or redeeming investment due to short term volatility can put your future goals in jeopardy. Remember 'Successful investing is about managing risk, not avoiding it'.
If you redeem your investment now you will not only incur loss but also lose out majorly from the market recovery. History suggests that the market stages a smart recovery after every deep slump. Therefore, you must hold on to your investment during this difficult phase but avoid riskier categories like small cap funds if you do not have a very high risk appetite.
If the market volatility is making you jittery opt for the systematic investment plan (SIP). This will help you to accumulate more units at lower prices during market downturn thereby potentially gain from 'rupee-cost averaging' over the long term.
[Read: Should You Stop SIPs Amid Coronavirus Outbreak and Market Fall?]
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Insure your well-being
Quality healthcare expenses have reached the skies. Medical emergencies come unannounced and if you are unprepared, it can drain your savings. Health insurance is the best gift that you can give to your family during for better assurance during challenging times.
Additionally, ensure that you have optimal life insurance cover. Your life insurance coverage should be sufficient to take care of all your outstanding liabilities, plus it should allow your family to fulfill their life goals in your absence.
The purpose of insurance is indemnification of risk from an untoward event. Therefore, it is best to keep insurance and investment needs separate.
Ensure timely payment of life/health insurance premium or else you will risk losing the benefits. The government recently relaxed timelines for the payment of life/health insurance premium for FY 2019-20.
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Avoid falling into debt trap
Many people are using high interest debt such as credit card to deal with financial crisis and to meet expenses such as rent, utility bills, etc. While the use of credit card can help you sail over short term disruption in finances, one must ensure not to go overboard while using them. In case of late payment of bill, credit card companies charge a high annual interest rate of around 35-45%. Failing to make timely payments also affects your credit score. This can have adverse impact on one's finances.
A prudent budgeting exercise will help you to cut down on unnecessary expenses and thereby reduce the need for using credit card.
Bottom-line:
Given the unpredictability of today's world, proper financial planning throughout the year can help you deal with various challenges. The above mentioned steps will help you become financially fit. If you need help in managing your financial portfolio you can consider consulting a financial advisor.
Warm Regards,
Divya Grover
Research Analyst
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