Making peace with uncertainty: Adapting investment plans for the way forward
In April 2021, the coronavirus pandemic made an apocalyptic resurgence in India after a few months of lull. The country’s caseload and fatalities have been touching new highs every day and the fragile healthcare infrastructure has started to buckle. The semblance of normalcy that had manifested itself after the first wave of the pandemic seemed to ebb in late 2020 has now been crushed. Uncertainty reigns supreme and even though there has been no mandate of a nationwide lockdown businesses across the country have been disrupted to varying degrees.
While mass vaccination has been kickstarted but public healthcare experts have cautioned that it will be a while before it helps in achieving transmission control. If circumstances become indicative of a silver lining in the coming few months, a bounce back to regular routines for most citizens will continue to be staggered with the persistent fear of subsequent waves of infection. The overarching sense of uncertainty and that comfort of familiarity may thus remain elusive for a while.
We may have become accustomed to being confined to our homes for days on end with negligible social interactions but for many Indians the turn of events has resuscitated financial concerns. According to According to the Scripbox's Financial Freedom Survey 2020, 45% of Indians polled were uncertain about economic recovery in the aftermath of COVID-19 and the second wave may have plopped this number higher. If you are pondering over ways to adapt your finances to the unpleasant vicissitudes without having to compromise on your goals, a little mindfulness can go a long way in keeping undue stress at bay.
Building an emergency fund
The ongoing crisis has underlined the importance of having a strong emergency fund that can act as an anchor and help you sustain for a few months in case you are met with financial hardships. A solid emergency fund can act as a cushion and supplement your income or even replace it should there be an exigency. At a time when a massive public health crisis is underway, unexpected expenses like hospitalization or being forced to pay inflated prices for essential medical items which are in short supply are a major probability. You should emergency-proof your finances in a way that so that you can sustain your living expenses for at least six months and it should preferably include repayments of debt. Also, your emergency funds should be easily accessible and updated with nominees and the latest personal details.
Fine-tuning asset allocation
Reviewing asset allocation can ensure that your portfolio doesn’t have risks in excess of your appetite. For instance, given that equities rallied last year, the allocation to equities in your portfolio may have gone up. Now, revising the formula of the components of your portfolio in accordance with your goals is a prudent way to ensure that your portfolio remains in shape.
When it comes to analyzing your financial plan for a specific financial goal in mind, it is important to gauge the capital you would require and the time horizon of the goal and then decoding how recent returns have helped you in achieving your targeted corpus. In case you are left with little time to achieve your goal, you should consider whether the risk posed by the volatility owing to the climate of uncertainty could be a bigger evil than not meeting the goal itself or the possibility of trickle-down effects on other goals.
Tapping into the powers of mutual funds
In circumstances like these, it is common for people to wean away from risky investment instruments to find stable avenues for short-term liquidity but abrupt exits could be costly especially in the case of long-term investments. Instead of liquidating assets en masse, you can look for pockets within sectors that can help you strike the ideal balance between growth and risks. If you are worried that the ongoing spell of disruption may become protracted and cause stronger ripples of volatility you can move some of your money to lower volatility assets. This is where mutual fund investments can come in handy – you can choose from a plethora of debt funds for new investments that are less risky than their equity counterparts or you can reduce the concentration of equity funds in your portfolio to reduce chances of drastic impacts in the event of market corrections. Mutual fund offerings come in various shapes and sizes for every range of the risk spectrum and what’s more, starting new investments or withdrawing from existing ones is largely a hassle-free process. You could also consider booking profits from equity funds and investing the proceeds into stable, less-risky asset classes with low correlation to financial markets.
Not stopping investments
It is normal to feel too overwhelmed and anxious in the current circumstances which can make investors jittery about continuing investments. If you have mutual fund investments, it is important to bear in mind that volatility can in fact bring forth great investment opportunities. Spells of markets hitting the troughs will allow you to buy more number of units because the prices would be less and in the long run, the impact of these episodes gets ironed out thanks to the benefit of rupee cost averaging. However, it is better to not foray into any new investments that fall beyond the realm of your risk taking ability without expert advice because a protracted spell of uncertainty is likely to diminish risk appetites.
• Avoid incurring debts unless absolutely necessary. EMIs can become a major pain point later time should there be an emergency. But make sure you maintain good credit scores because it keeps the path clear for you to avail credit easily if the need arises.
• Develop the habit of differentiating between needs and wants. A well-structured budget can go a long way in saving money which can then be diverted to investments.
• What with it being impossible to stipulate a timeframe when the threat posed by the pandemic reduces, your health insurance should be top notch. Re-evaluate your existing coverage and don’t hesitate to top it up if need be.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.