Given the onset of Omicron, 2022 promises to be a year of grit and resilience. The continuing wrath of the pandemic requires us to be brave as well as optimal, and to set New Year resolutions for a secure and robust financial future. We must adhere to the fundamentals of savings and investment, and reset and rebalance portfolio for a prosperous tomorrow.
Various reports highlighted financial challenges such as reduced income, paused savings and investments, dipping retirement corpus, exhaustion of emergency fund and high dependence on employers’ insurance schemes in the last two years. Multiple factors, including the lack of financial planning, made it harder to cope with COVID induced health and financial challenges in India.
However, the ongoing troubles have excellent learnings for the future. Here are six golden mantras for fool-proof financial planning in 2022.
Review and rebalance your portfolio
Portfolio rebalancing is an annual ritual for every investor. After each market correction and also on periodic occasions, you must rebalance and restore your investment mix to the original allocation. For uninitiated, an investment portfolio should be mapped according to the asset allocation determined after a thoughtful deliberation on financial goals, income and risk appetite. Beginners must use professional help and try to understand market volatility basics, types of asset classes, exit costs and tax implications before beginning their investment journey.
A well optimized portfolio will always include diversified stocks/ funds basis time horizon and risk appetite, picked according to short, medium and long term goals. Portfolios club options to save for your next car, down payment for home loan, child’s education and retirement corpus, all at the same time. Rebalancing offers you opportunity to reduce portfolio risk and book profits in time. This holds true for direct equity, mutual funds as well as debt funds!
Direct equity stocks
Stock markets in 2021 posted largest annual gains in four years. BSE Sensex and NSE Nifty reported growth of 22 percent and 24 percent respectively. India's blue-chip Nifty 50 surpassed MSCI World Index (at 17 percent) and became one of the best emerging markets performers in Asia. After a profitable 2021, we expect another year of double-digit returns and a continued wealth creation spree. However, with buzz around third COVID wave, market volatility may remain rampant this year too. Sticking to original allocation, booking profits and rebalancing will certainly help.
A beginner investor need not live under FOMO (fear of missing out) and begin their investment journey by picking index funds. With diversification and minimum risk, index funds help you gain with top gainers and also hedge against market downturns. A time tested wealth building strategy.
Start goal based SIPs
Mutual fund investment route re systematic investment plans (SIPs) is one of the best wealth creation strategies. Anyone who has low to moderate risk return appetite and wants to save for multiple life goals should opt for SIPs. Each mutual fund scheme is managed by professionally run Asset Management Company. Basis the nature of the scheme, the fund invests into a combination of options such as stocks (equity), bonds (fixed income), short-term debt (money market funds) etc.
You can pick 2-3 schemes, i.e. equity fund, debt fund or hybrid fund basis your risk appetite and time horizon and start saving for different goals. With constant SIPs, you do not need to time markets. You will buy less units during high markets and more units during low markets, thereby averaging out market risk and continue building wealth in the long term. All in all, an SIP route offers maximum security against market volatility and combines ‘power of compounding’ for wealth creation. In the New Year, resolve to continue your SIPs for long term plans.
Continue nurturing emergency fund
The significance of emergency funds has been underscored by the pandemic gyrations over the last two years. As a rule of thumb, each household should accumulate an emergency fund, equivalent to six months of expenses. The contingency fund should be parked in a liquid option with no exit load. Throughout your life cycle, you should nurture this account and make it fool proof against economy/ inflation shocks. After a setback, restock as soon as you can.
One of the convenient ways to refill or keep your emergency fund intact, is to allocate a fixed amount periodically. Never consume this fund for not-so-urgent situations and compulsively water it till you achieve the targeted corpus.
Adequate Insurance
Inadequate insurance can dent even the best of the financial plans. Make sure your family is sufficiently covered against exigencies. You need a minimum of Rs 10 Lakh family floater plan for a four-member family, according to current hospital and health care expenses. Amidst COVID times a top-up up to Rs 50 lakh/ 1 Crore is highly recommended. You should not depend on employer’s scheme for your family’s health cover needs.
Pure life cover is another essential add on. Buy a term plan for at least 10X annual income so that there is sufficient exigency coverage for your family.
Monitor credit report
You should regularly monitor your credit report and track credit score. A score above 750 makes you eligible for pre-approved loans and credit card offers. Availability of loans can play a vital role in meeting your life goals. Make a New Year Resolution to keep your score high. A robust score indicates financial discipline and high creditworthiness.
Furthermore, tracking credit report also guards you against online identity thefts.
Opt for low cost credit options
Loans are an efficient option when availed as enablers for your plans and aspirations. However, multiple unsecured accounts and high EMI/ NMI ratio can make it difficult to manage your finances. Non-payment of EMIs and credit card outstanding can severely jolt your credit score. It is thus important that you do a cost analysis and build a repayment plan before availing fresh credit. For instance, if you are an existing home loan customer, you can avail Overdraft (OD) facility starting from 7.50 percent a year for any urgent cash emergency.
Financial planning is not a one-off activity. It is a continuous journey which requires constant nurturing. Despite blips of yesteryears, it’s time to look ahead and plan for a flourishing future. Happy New Year.
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