7 MinsMay 15, 2020
The novel Coronavirus or COVID-19 has triggered not just a medical crisis but also a financial one. Organisations – big and small -- are announcing pay cuts, job cuts, deferred payments, and in turn, the money tap is running thin or dry.
Indeed, there is a threat to financial stability, and risk-aversion is setting amongst investors: some preferring to hold cash than take the investment risk. But continuing to invest in productive avenues is the only way out to counter inflation
and maintain a comfortable lifestyle.
So, here are some dos and don’ts for you to deal with the COVID-19 crisis:
1. Holding Cash:
Do: It is definitely a wise idea to hold cash in times of economic uncertainty because you never know when you may be faced with a job loss or a pay cut. To deal with any contingency or emergency, ideally hold 6 to 12 months of
regular expenses, including EMIs on loans. Park this money into a separate savings bank account and/or a Liquid Fund or an Overnight Fund, and never touch this money unless it's an emergency.
Don’t: When keeping sufficient cash for a rainy day, ensure that you do not under-apportion or even over-apportion. Holding excess cash will not help you counter inflation, plus there will be an opportunity cost to it. Meaning,
you may lose out on attractive investment opportunities available (like at present in the Indian equity market where valuations look attractive and there is a decent margin of safety). Similarly, holding inadequate cash will leave you in a
lurch, God forbid if the need to utilise it arises owing to a contingency.
2. Asset Allocation:
Do: Asset allocation is distributing your investible surplus across asset classes such as equity, debt, gold, or even holding cash. Factors that determine asset allocation include your age, income & expenses, asset & liabilities,
risk appetite, the broader investment objective, financial goals, and the time in hand to achieve the envisioned goals. It would make sense to review your asset allocation now; because many factors may have changed. This will help you set
realistic return expectations, avoid the worry of timing the market, ensure liquidity, and minimise the investment risk.
In times of economic uncertainty, gold acts as a portfolio diversifier and a hedge when other asset classes fail to post attractive returns. Going forward, due to factors such as easy monetary policy action, trade war tensions, geopolitical tensions,
etc., the spotlight will continue to remain on gold. So, allocate around 10-15% of your entire investment portfolio to gold via a gold ETF and/or a Gold Savings Fund and hold it with a long-term view. Alternatively, you can take tactical exposure
via a worthy Multi-Asset Fund.
Don’t: Do not make the mistake of choosing asset classes (and investment avenues therein) in an ad hoc manner or following what your friend, colleague, relative or next-door neighbour does with his investments. Avoid the
herd mentality. Keep in mind, investing is an individualistic exercise. While the Indian equity market has corrected sharply over the last couple of months owing to the economic uncertainty surrounding COVID-19, do not rush to buy any and
every stock and/or equity-oriented mutual fund scheme out there. Choose after thorough research and do not over-diversify. Over-diversification will make the portfolio bulky, add to the hassle of managing it, and beyond a point does not add
any extra benefit or lower the risk. Do not speculate in gold and avoid investing in physical gold.
3. Redeem or Stay Invested?
Do: Investments in certain asset classes, viz. equity and gold, and investment avenues therein, need a longer investment horizon to generate wealth meaningfully. Hence, continue with your investments in fundamentally sound stocks
and even increase your allocation if possible.
Similarly, continue with your Systematic Investment Plans (SIPs) in equity-oriented Mutual Funds even if they have seen losses in the short-term. This will help you essentially accumulate more equity
shares and equity-oriented mutual fund units (particularly the worthy ones) at lower prices thereby potentially gaining from ‘rupee-cost averaging’ over the long term.
Don’t: Avoid selling your equity shares and/or equity mutual funds at the first sign of market volatility. This can prove ineffectual in the long run and jeopardise your financial wellbeing. Acting in panic often results
in wrong investment decisions and derails achieving the envisioned financial goals.
[Also Read: Financial planning tips to save for your future]
Do: Amidst the COVID-19 pandemic, ensure you have adequate life and health insurance. Your life insurance coverage should be sufficient to take care of all your outstanding liabilities, plus it should allow your family to fulfil
their life goals in your absence. Likewise, given the cost of healthcare is on the rise, having sufficient health insurance coverage too is imperative. Approach insurance premiums, as one of the expenses on essentials, to enjoy uninterrupted
Don’t: No compromise should be made while indemnifying risk to health and life. By not having an optimal insurance cover, you may end up exhausting your finances and investments assigned for other important goals. Hence,
don’t stop paying your insurance premium when facing a shortage of funds. Besides, when you buy an insurance policy later, you may have to pay a higher premium.
Like your medical health, your financial health requires precautions. By following the aforementioned dos and don’ts, it will be possible to be financially fit.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.