A Checklist To Keep Your Finances Healthy Amid Turmoil
A customer walks past empty shelves after sugar, flour, bread and cakes products sold out in a J Sainsbury Plc supermarket in London, U.K. (Photographer: Bryn Colton/Bloomberg)

A Checklist To Keep Your Finances Healthy Amid Turmoil

From social distancing and improved hygiene to aggressive quarantine, the Covid-19 pandemic has prompted governments worldwide to step up measures to counter the spread.

Still, the new coronavirus has stalled the global economy. Airlines to small service providers are staring at an uncertain future as demand plummets. That may ultimately lead to financial strain on employees and business owners.

While policymakers grapple with measures to soothe the economy, experts suggest people also draw up a personal finance checklist to help tide over the impending financial turmoil.

Here’s what they say:

Make Sure You Have An Emergency Fund

All five financial planners BloombergQuint spoke with said an emergency, or a contingency fund, is paramount.

“My worry is that a lot of businesses will get impacted by this pandemic,” said Arvind Rao, founder of Arvind Rao & Associates. “In that situation, if people lose jobs, it could well be a few months before normalcy is restored. Even if the spread of the virus is contained in a couple of months, it will take much longer for businesses to get back on their feet.”

So, a contingency fund is an absolute must. Think of it as the piggy bank you had when you were a child. Except, this one is labelled ‘emergencies’. Each individual, or family, requires a different amount in this fund.

In an ideal situation, according to Harshvardhan Roongta, founder of Roongta Securities, a family should have an amount equivalent of six months’ expenses saved up. This should include equated monthly instalments on loans.

In reality, though, this amount is not so easy to accumulate, especially because of the high cost of living in the metros. With that in mind, families should aspire to put in place a fund that will tide them over at least three months of no income.

The money in the contingency fund should be easily accessible. Most financial planners recommend using liquid debt funds.

Kartik Jhaveri, director at Transcend Consulting, also advocates keeping a little extra cash handy.

Health Insurance For Yourself And Your Family

Not many people in India buy health insurance. The latest data released by the Insurance Regulatory and Development Authority of India show non-life insurance penetration in the country is 0.9 percent.

Most salaried individuals tend to depend on the medical insurance provided by employers. Financial planners stress that this cover is not enough and call the tendency to only rely on it dangerous. The reason is that the mediclaim provided by a company is only valid as long as an individual is an employee. In the event of a job loss or if a person is between jobs, the mediclaim is invalid.

The Covid-19 is a bigger threat to those above 60 years of age and to people with underlying chronic medical conditions. Financial planners recommend topping up with health insurance plans that will cover all the members of your family.

And while the regulator has explicitly told insurance companies to process claims associated with Covid-19, Arvind Rao, founder of Arvind Rao & Associates, said it’s a good idea to double-check.

Like Social Distancing, Practice Portfolio Distancing

Tracking the global selloff, India’s benchmark Nifty 50 index has fallen more than 30 percent in just over a month. This slide in equities has been compared with the crash that followed the global financial crisis in 2008.

Rohit Shah, chief executive officer of Getting You Rich, said investors should try to practice “portfolio distancing” to cushion themselves from shocks.

Financial planners generally recommend using equity investments to meet long-term goals. That’s because while equities as an asset class have the highest potential for returns, they are also the most volatile. ‘Black swan’ events, like the outbreak of the coronavirus can very easily wipe out gains made over several years.

“You should not book losses, because that’s converting a notional loss into a permanent one,” said Mrin Agarwal, financial expert and founder of Finsafe India. “Instead, if any of your investments are doing very badly, put them on a watch list for six months before you make the decision to sell.”

Invest Excess Money Into Equity For Long Term

Warren Buffet famously said that as an investor, it’s wise to be “fearful when others are greedy and greedy when others are fearful”. But witticisms aside, this is also what most financial planners advise.

Once a person has made provisions for a contingency fund and taken care of expenses towards health insurance, now is a great opportunity to deploy money not needed immediately in equities, according to financial experts.

“If you have a lump sum, you shouldn’t invest all of it at one go,” said Rao. “If you have a lump sum you want to deploy in the equity market, you should do it in stages. For example, if you have Rs 100, you should only invest Rs 25 and then wait.”

With volatility in the Indian equity markets at record levels, wild swings will give informed investors ample opportunities to make smart purchases. Roongta said his firm is advising clients to buy quality companies. “The prices may go down further from this point, so you could get the price wrong, but if you’re buying quality, you won’t get the company wrong,” he said.

Rao said large-cap companies and mutual fund schemes that focus on buying them should be preferred over mid and small caps. “You should also continue with your systematic investment plans because this is their primary purpose—cost averaging.”

Avoid Large Discretionary Purchases, Fresh Loans

People should ideally put off large discretionary purchases like cars or home appliances, according to Kartik Jhaveri. It’s also not a great idea to take a fresh loan in this environment.

Finsafe’s Agarwal, however, pointed out that with interest rates having fallen significantly and are likely to fall further. Now is probably a good time to approach your lender to get a better rate on existing loans.

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