COVID-19–3rd wave: Learnings from the 1st two waves
In the second wave of COVID-19 there were surging cases of infection. Many states went under lockdown emulating the start of Covid 19 in 2020 to control the spread of infection and deaths. Last year, when the pandemic struck and we were shut indoors, there was a heavy economic toll. Lost jobs and pay cuts tore Shankar’s financial plans and broke his confidence in the investment. So, what were his key learnings from that for the third wave this time?
Emergency funds and insurance
He realized the importance of an emergency fund — a corpus equal to a minimum of six months’ expenses including EMIs if any. This will help him ride out a period of job loss or interest income. Invest in it and build it now! For others, if you are close to your financial goals, take some money off the table right away to build it.
Shankar has taken up both insurance covers in the past year. Spruce the life insurance up to ensure your loved ones are well-protected. And ensure that Covid is covered in your medical insurance policy to avoid erosion of your savings in case of any medical emergency Do you know what to look out for in a medical insurance?
Markets are choppy, but John knows better now
Hopefully, we are wiser investors this time around. Last year, the BSE Sensex fell 38% in March. John panicked. He stopped his SIPs and withdrew his investments in a hurry.
Remember the equity markets are expected to be choppy for some time this year, depending on how bad the COVID-19 situation gets. But falling markets also give you opportunities to make serious money, if you stay invested .
Diversifying abroad
The COVID-19 pandemic has not affected all countries uniformly. You can derive the benefit of diversifying overseas. John started with a small allocation to USA index funds and increased it over the year using SIPs. Shankar continues to have some allocation to gold.
Careful with your spending
The lockdowns changed our spending patterns. Many cut down their expenditure drastically and even moved back to their older cities embracing work-from-home. We realized how little we needed to spend. But online shopping to kill boredom, can lead to very unnecessary expenses, which hurt your finances in case of a job loss or a fall in income. Become aware of your spending habits and save more.
Reduce dependence on loans
Though the moratorium helped Shankar in his financial trouble to some extent, remember he was still liable to pay the accrued interest. It is actually a double whammy as the payout increases substantially over time. Pay equated monthly installments (EMI) on time. John had some surplus money and used some of it to pay down high-cost loans. Ensure that you have sufficient liquidity. In the worst-case scenario only, should anyone go for secured loans.
Buying that 2nd / 3rd home
Avoid buying another property for investment purpose using a home loan just because the interest rates are low. Real estate is a very illiquid asset and cannot be sold in a hurry during uncertain times. You must switch home loans in case you get better lower rates. Try to save on switching costs.
I would end by saying that having an emergency fund, maintaining a suitable asset allocation, and taking adequate life and medical insurance cover are money lessons that have been reinforced for both Shankar and John Kumar. Talk to a financial advisor to see how to rebalance your portfolio as per the new situation. Maybe you need to allocate more to gold to de-risk? Maybe the corpus you are looking for, can be pulled out for reinvestment later? Maybe that 2nd home you already have is not giving you commensurate returns? There are so many variables for your financial goals that a good financial advisor looks at before arriving at your asset allocation.
