The COVID-19 pandemic-stricken 2020 has helped us grow much wiser, with many money lessons from this highly eventful year. You can use the crisis lessons to fix your personal finances. Here are six money resolutions that you must take and follow to wade through New Year 2021, which is bound to feel the after-effects of the COVID-hit 2020.
#1: I will maintain a large emergency fund
When COVID-19 struck, many lost their jobs and businesses shut shop. Most of us dip into our savings and investments to run the household when our incomes fall – or worse – stop altogether.
That’s where an emergency corpus comes in. This kitty should be held in liquid instruments such as fixed deposits or liquid mutual funds – to be used only in the case of contingencies arising from job loss or pay cut. Your emergency corpus should be enough to meet your monthly food and other expenses, including children’s school fees, EMIs and so on. It should be large enough to take care of at least six months’ household expenses. However, if your source of income is irregular or you are the sole earning member in your family, it makes sense to create a larger corpus worth nine months’ expenses. As far as possible, avoid taking personal loans to meet routine expenses.
#2: I will buy adequate health and life insurance
The uncertainty and spread of COVID-19 reminded us the importance of having a health insurance cover. The demand for health and life insurance has increased significantly in these COVID-19 times. However, insurance penetration in India continues to be low, which means that there is a need for even greater awareness. If you are in the age-group of 35-40, you must ensure that you buy a health cover of at least Rs 10 lakh for your family, to start with. Review your cover every five years and increase the amount in line with healthcare inflation.
While buying term insurance – a simple cover that pays out the sum assured to the dependents in case of the policyholder’s death – calculate your assets and liabilities to know how much term cover you need to buy.
The sum assured should be capable of replacing your income and paying off your loans to ensure that your family’s goals remain on track in your absence.
#3: I will stick to my asset allocation, SIPs
From its March 2020 lows, the Nifty 50 index has risen 73 percent. But if you check out its gains since the start of the year, the Nifty 50 is up just nine percent.
Equity markets are at new highs and fund houses are happily rolling out new schemes. When your portfolio becomes lopsided, do not forget your asset allocation. Many of us move in a herd in search of the next hot opportunity. Such misadventures can backfire badly if we invest in avenues without any logic.
Instead, practice asset allocation. If the equity portion of your portfolio has become oversized, take some profits off the table and deploy in debt instruments. But if the proportion of equity in your money bag goes down than what’s normal, then invest additional sums in stocks or mutual funds. “Asset classes – equity, debt or gold – have low correlation with each other. Together, they reduce risk and optimize returns in the long term,” says Parul Maheshwari, a certified financial planner.
Continue your systematic investment plans (SIPs) as well. So long as your income is steady, your savings and regular investments must be continued.
#4: I will take calculated risks
One big lesson investors learnt from the winding up of Franklin Templeton’s bond funds is not to underestimate credit and liquidity risks in search of high returns. Though most investments are assessed from the returns point of view, you should never ignore risks. Schemes investing in low-rated bonds, especially credit risk funds, are for those with high risk-appetite. You must ensure that your portfolio is liquid enough.
Though 2020 has given many lessons on risks to investors, you should not shun risk altogether. “The decision to take risk should be taken in the context of the investment objective of an investor,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors. When you are saving for an emergency fund, you should choose investments such as bank fixed deposits and liquid funds since they carry very low liquidity and credit risks. “If you are investing for long-term goals such as retirement, then you should be taking some risk by investing in well-diversified equity mutual funds,” Savanur adds.
Investors should take risks wisely.
#5: I will not choose a bank merely for high FD returns
After the PMC Bank crisis last year, 2020 saw more banks running into trouble – YES Bank and Lakshmi Vilas Bank – being the big names that went under. However, the Reserve Bank of India (RBI) stepped in on time and got stronger banks to fashion a rescue act for protecting depositors’ interests. For depositors, the lesson to draw from these crises is this: never choose a bank merely for 50 basis points higher interest or because of the convenient location of branches. The safety of your deposits should be paramount. Also, do not put all your eggs in one basket – diversify, but not across more than two or three banks. The year 2020 also saw the RBI being armed with more powers to supervise co-operative banks, which will ensure stringent quality control, and potentially fortify depositors’ interests.
#6: I will switch to external benchmark-linked loansProperty prices are at a 15-year low these days. Now is the best time to buy a house, if you are looking for one. There’s more good news. Interest rates on home loans have also fallen this year. This benefits existing home loan borrowers. If you aren’t already on a home loan that pegs itself to an external benchmark rate, then you must use this opportunity to shift banks. This will ensure better transmission of RBI’s policy action. But make sure that the new lender offers you a loan that is at least 50 basis points cheaper than your current lender’s. Don’t forget to negotiate with your existing lender before taking the final call.