‘Set aside around six months’ monthly expenses for emergencies.’
‘Keep this money in safe and liquid options, such as liquid funds and fixed deposits.’
The global economy is currently facing uncertain times, amid bank collapses and job cuts at major US-headquartered corporations.
India’s chief economic advisor, V Anantha Nageswaran, recently emphasised the need for corporations, households and investors to maintain a margin of safety in these volatile times.
While India’s domestic economy is in reasonably good shape, its financial market can’t remain immune to global volatility.
Amid the prevailing risk-off sentiment, global capital is likely to move away from equities and into safe-haven assets such as treasuries and gold.
Investors need to be cautious with their personal finances and investments in such times.
Develop adequate emergency corpus
Everyone, regardless of age, must create an emergency corpus.
“Set aside around six months’ monthly expenses for emergencies. Keep this money in safe and liquid options, such as liquid funds and fixed deposits,” says Anil Rego, founder and CEO, Right Horizons.
Your emergency funds must be adequate to take care of a few months’ home loan EMIs, insurance premiums, and children’s tuition fees, along with household expenses.
Rego suggests that everyone should also maintain sufficient liquid assets over and above the emergency fund.
Dynamic asset allocation funds, according to him, are a good option for maintaining these funds as they manage risk well.
Singles must avoid excessive risk
While equity valuations have turned attractive, it is advisable to avoid taking excessive exposure to risky assets.
Those interested in direct stock purchases should stick to companies having a strong balance sheet and a track record of consistent profitability.
If you wish to invest in equities, it is safer to do so through diversified, well-managed equity schemes that have a sound long-term track record.
Take exposure to fixed-income instruments, too.
“If you invest in non-volatile instruments as well, you will have greater confidence in your investments as you see them grow steadily,” says Arvind A Rao, founder, Arvind Rao and Associates.
Singles must also have adequate insurance and avoid unnecessary debt.
“Have medical insurance of at least Rs 5 lakh in the early stages of your career. And instead of relying on loans, save money and then buy whatever you want,” says Suresh Sadagopan, managing director & principal officer, Ladder7 Wealth Planners.
Middle aged need more protection
People at this stage tend to have larger families and more dependents. Hence, they need bigger insurance coverage.
“While personal medical insurance for the entire family is a must, having adequate life insurance also becomes important, now that several people are dependent on your income,” says Sadagopan.
Many people at this stage have outstanding loans, especially home loans. Increasing interest rates over the past year have led to home loan tenures rising.
Many borrowers are worried on account of this. Those who have surplus cash should use it to partially prepay their loans.
“The home loan EMI should ideally not exceed one-third of monthly income,” says Rego.
He also suggests avoiding overexposure to assets or investments where money would get locked in for the long term.
Retirees must aim for safety
After years of hard work and saving, retirees are likely to have accumulated a sizeable corpus.
“Since retirees are dependent on their capital to meet their expenses, they should have adequate exposure to fixed-income or guaranteed-income schemes. They should also adopt a balanced approach, avoiding the extremes of too little risk or excess risk. Too little risk may result in returns not beating inflation on a post-tax basis. Too much risk may create volatility and stress,” says Rego.
Investment products with long lock-in or large, multi-year commitments must be avoided.
“Have at least 25 per cent of your portfolio in short-term investments that mature within 12-24 months or in investments where the lock-in period doesn’t exceed six months,” says Rao.
Retirees must have a larger emergency corpus that allows them to meet their expenses for 12-18 months.
Medical expenses tend to rise with age.
“A person nearing retirement should consider increasing health insurance cover to, say, Rs 10 lakh per person or Rs 15 lakh for a couple or more, if finances permit,” says Sadagopan.
- Have term insurance equal to 10 times your annual income.
- Alternatively, adopt the following formula: (60 less age) X current annual income.
- Buy floater health cover worth Rs 5-10 lakh if you live in a non-metro; Rs 10 lakh-Rs 20 lakh if you live in a metro (more if you can afford it).
- Sum total of all EMIs shouldn’t exceed 50 per cent of your take-home salary.
- Percentage exposure to equities in your portfolio should equal 100 less age (tweak this formula for risk appetite and investment horizon).
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