The economic uncertainty caused by the COVID-19 pandemic led to widespread job losses, income disruptions, liquidity crisis and debt repayment failures for a large section of people.On the investment front, equity markets officially entered the bearish market zone during the months of March and April, creating panic among many investors while presenting a wealth creation opportunity for the more seasoned ones. With 2020 drawing to a close, it would be prudent to apply the lessons learnt for long term financial fitness.
Handling disruption Income disruptions and job losses caused by the pandemic have re-emphasised the importance of having an adequate emergency fund in place. These disruptions caused a large number of borrowers and credit card holders to opt for a moratorium on loan and credit card repayments. Only those who had adequate emergency funds prior to the pandemic were able to manage their expenses and make debt repayments despite the disruption. Those who did not have emergency funds to fall back on might have ended up liquidating their long term.
Investments or failed to repay their debt commitments. Hence, ensure that you create an emergency fund large enough to meet unavoidable expenses such as rent, daily living expenses, children’s education, EMIs, other debt repayment obligations, insurance premiums, utility bills, and monthly contributions towards crucial financial goals for at least six months.
As financial emergencies can strike any time, park your fund in liquid instruments such as savings accounts to make instant withdrawals. Those comfortable with Internet or mobile banking can park their funds in high yield fixed deposits offered by small finance banks and other scheduled banks. There could not have been a bigger wakeup call than the pandemic to help us realise the importance of having adequate health insurance.
It served to remind us that a single hospitalisation bill could easily wipe out one’s life savings in the absence of health insurance. Hence, one crucial financial steps to take in 2021 is to purchase adequate health and critical insurance policies to cover unforeseen medical expenses for you and your family. Even those covered under an employer’s group cover should buy a separate health insurance policy. Employer Provided health covers are often inadequate to deal with rising healthcare costs and would only be valid till the period of employment.
Economic uncertainties also led to steep corrections in the equity markets in March and April. This resulted in the value in most SIPs, which had started in the last 34 years, turning deep red. Such a steep fall in returns resulted in many investors panicking and halting their equity SIPs due to fear of further losses. Allow no breaks However, what these investors failed to realise is that such losses are only notional and become real only when the investor redeems his/her investments at a loss.
Equity markets had started to steadily recover from April as the government gradually began unlocking the economy, and market indices started to reach new highs from November. Hence, investors who continued with SIPs throughout the year purchased units at a much lower cost, averaged out their investment cost and would now be registering much higher returns visavis investors who halted their SIPs.
The periods of steep market corrections similar to the one seen in March and April this year serve as an excellent opportunity for long term wealth creation. As quality equities are available at very attractive valuations during such bearish market phases,mutual fund investors with investible surplus should exploit such market conditions by making lump sum investments in a staggered manner to top up their existing equity fund investments.
Such moves would allow them to average out their investment cost at much lower levels and can even help them reach their set target corpus sooner than expected. However, while topping up equity investments during future market corrections, avoid using emergency funds or money set aside for short term goals. Any financial emergency or the maturity of a short term financial goal during a prolonged bearish market can force you to redeem your investments at a loss or seek loans to meet your fund short.