It is with great apprehension that many of us are preparing to gradually come out of confinement and expose ourselves to the risks of a return to economic activity. In these circumstances, we are advised to take great care to protect ourselves primarily by strengthening our immunity from within and taking precautions from the outside.
Build internal immunity
This is perhaps the most important resistance line. Through a combination of a healthy diet, adequate rest and regular exercise, we try to make our body a stronghold capable of withstanding any external attack. And if by any chance we fall prey to the virus, our immunity is strong enough to fight it and bounce back quickly.
Likewise, our financial portfolio must be inherently strong. Having the right asset allocation – that is, the right mix of stocks, debt, and alternative investments – is perhaps the most important factor in determining the success of a financial strategy. This ratio can be derived from a combined assessment of an investor’s risk profile as well as the time horizon of important financial milestones such as an education goal or the purchase of a home, which would require the set aside large allowances for this purpose.
Asset allocation ensures that a portfolio is sufficiently diversified and geared towards a given asset class. For example, a portfolio with a strong focus on equities would have shown a marked underperformance in recent months compared to a portfolio with a good balance between equities and debt. Likewise, a person with a high exposure to real estate would not only have experienced stagnant returns and high maintenance costs, but also total illiquidity which can become a drag and cause anxiety when important financial goals are reached. imminent.
A portfolio with a good asset mix not only ensures adequate liquidity, but is also able to withstand external shocks and provide optimal risk-adjusted returns.
Take external precautions
Most of us have received countless tips on what to do with our moving house or in our daily activities. Social distancing, wearing a mask at all times, regular disinfection of hands and work surfaces are some of the measures that have become an absolute necessity.
Likewise, we must protect our portfolio by taking adequate risk protection measures to ensure the health and hygiene of our finances. This is mainly related to:
Contingency planning: We need to make sure that we set aside a contingency fund of 3-6 months of spending in a way that is liquid and easily accessible to us in an emergency. It could be a medical situation or, as in the current circumstances, a period of economic uncertainty where one is faced with the prospect of wage cuts or job loss.
Maintaining a contingency fund can help you weather the storm during a crisis and provide financial support until things return to some form of normalcy. Typically, funds can be placed in your A / C savings with a sweep FD or in liquid funds.
Medical insurance: One of the most crucial financial lessons learned today is the importance of having adequate medical insurance for the whole family. With the cost of medical treatments and hospital fees increasing over the years, it is recommended that each individual have a minimum coverage of Rs 5-10 lakh depending on age, pre-existing conditions, hereditary factors, etc.
Supplemental coverage can be taken to improve overall coverage in a cost effective manner. In addition, critical illness coverage and a personal accident insurance policy may also be considered. The absence of full medical coverage would lead to depleting one’s savings during a medical emergency, derailing the overall investment plan and jeopardizing the achievement of its financial objectives.
> Life insurance: Life insurance provides financial protection to a family as an income replacement in the event of the unexpected death of the breadwinner. According to a 2019 study based on government and industry data, up to 988 million Indians or 75% of the country’s population (which is more than the population of Europe) do have no form of life insurance.
The unexpected loss of a loved one can be extremely traumatic for a family, and their ability to cope can become all the more difficult if not financially supported. Therefore, the importance of having substantial life coverage cannot be overstated.
In line with current lifestyle expenses and the inflation trajectory in India, a minimum coverage of around Rs 2 crore is recommended for someone with dependents and the most effective way is to use a term plan , which can provide relatively large coverage at a small premium.
Human Value of Life (VHL) calculators are commonly available online and help determine the exact amount of life coverage needed based on age, income, expenses, obligations, and future goals. In cases where both husband and wife contribute household income, it is essential that both partners are adequately covered.
The term of the policy should continue until his working years; however, several companies now offer tenures up to the age of 80, albeit at a higher price.
Beyond all of this, it’s important to maintain a holistic approach to building long-term wealth. Markets are likely to be volatile from time to time, but with these safeguards in place, your financial portfolio will be better able to withstand any external shocks and you should refrain from panicking or having knee-jerk reactions.
Just as we do annual health checks, it’s just as important to consult your financial advisor and regularly review the portfolio to look for red flags or rule out underperforming investments.
(Raveendra Balivada is Head of Investment Advisors at HDFC Securities. His views are his own)