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Financial Advice for Difficult Times

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A few months ago, our Associated Director, Shrey Mehta had written an article titled “Financial Advice for Difficult Times”. We are proud to share that the article has been published in the Journal of Indian Orthodontic Society!

Though the article was written keeping doctors in mind at a time when we were at the peak of the covid-19 induced financial crisis, the advice holds true for everyone in every crisis. You can find the full article here. Following are the main excerpts from the article –

Financial Advice for Difficult Times

With the Covid-19 pandemic, we are witnessing an unprecedented moment in history that has impacted the entire globe at a never before seen scale. This coronavirus has resulted in a double black swan event where there is a health and financial pandemic at the same time.

As doctors, you are Corona Warriors and our first line of defence! But even you would be facing a decrease in patients and earnings, maybe even an increase in your expenses as you are battling through this pandemic. These turbulent times have greatly affected businesses and livelihoods and everyone wants to know the best thing that they can do to manage and optimize their personal finances.

Even though this is an unprecedented double whammy, crashes in the financial markets are not uncommon.

Each financial market crisis brings with it a chance to learn and the most important learning of all is – STICK TO THE BASICS. If one has their basics in place, their financial foundation can withstand any turmoil and even capitalize on it!

Following are some Basic Financial Planning Mantras that can help you navigate this current crisis and any future ones that may arise on your Road Towards a Secure Future –

Having an Emergency Fund is often the simplest and most overlooked aspect of personal finance. In a crisis like this, many could be facing salary cuts, doctors would be facing a drop in their clinic revenues. One should ALWAYS have at least 6 months’ worth of their household expenses in a safe and liquid instrument (like Liquid Funds) so that times like these don’t have them worrying and selling long term investments at losses to pay for basic expenses. For those of you who have their own clinics, your emergency fund should cover 6 months of business expenses as well as your staff depends on you.

Health Insurance is essential as you don’t want spend your hard-earned savings and investments in medical expenses. Most doctors have this point covered; however, some are under insured and don’t even know it, while others may have outdated policies that do not provide the coverage that is required. Doctors with Independent Practices should also get health insurance for their employees and support staff as this essential for peace of mind safeguarding your business. There are many economical group insurance policies available today.

While most of us have health insurance figured out, Term Insurance still remains a challenge. We refuse to accept our own mortality and think that nothing bad can happen. Many think that they are safe because they are covered with their LIC Policies. These policies have a very poor sum assured and even if you have multiple such policies, just add them up, they will not be sufficient for your family in case of a mishap. If you don’t have term insurance, buy a simple vanilla term plan that has coverage of at least 12-15 times your annual income.

Asset Allocation is the single biggest factor that determines long term returns and makes sure that one’s portfolio is balanced enough to sail through choppy waters. Asset Allocation is a fundamental of investing where an investor sets a fixed percentage of exposure to different asset classes like Equity, Debt, Real Estate, Gold etc. based on goals, risk tolerance and investment horizon.

  • Many doctors I have noticed, are over exposed to Property, they face the issue that their capital is tied to ill-liquid assets and is not available to them at a time of need.
  • The risk takers are generally over exposed to Equity, they see their portfolios majorly in the red and panic. Many even make the mistake of selling equity investments to protect themselves from further loss.
  • The conservative ones have most of their money in fixed deposits and gold and miss great opportunities to multiply their wealth.

But if one has carefully decided an Asset Allocation that suits them and has appropriate exposure to the different asset classes – Property, Equity, Debt (Fixed Income) and Gold, they will not face any problems and even stand to capitalize on market crashes by re-balancing their allocation and investing more in equity to generate greater returns in the long run.

With basics in place, you and your family are safe and secure. With safety out of the way, following are some things that you should keep in mind and follow right now –

DON’T PANIC – The most important thing is to not get carried away by headlines and make knee jerk reactions in panic.  Long-term investors should not panic and redeem their investments in a hurry in the current market, don’t convert your notional losses into actual ones. Remember that you have invested in equity only for the long run and you must not let short term volatility affect your overall financial plan. Markets go through these cycles sometimes and the true test of an investor is to focus on his goals and stay invested.

Stick to your Asset Allocation. Be Patient. Stay Invested.

DO NOT STOP YOUR SIPs – the main reason we invest via SIPs is to use rupee-cost averaging to accumulate greater units in such market conditions. So, unless you are facing grave troubles due to job loss or salary cuts or have an emergency and you need the capital right now, please do not stop your SIPs, rather – Use this opportunity to top-up and increase your monthly SIPs. Market crashes are the best time for your SIPs as you get more units which increase your long-term returns.

INVEST IN EQUITY In hindsight, one sees that all crashes are EXCELLENT BUYING OPPORTUNITIES, so if you have ample liquidity and your asset allocation allows it, seize the opportunity and invest in equity mutual funds. However, keep in mind that one must stagger the lump sum amount in 3-4 tranches as no one can predict the exact bottom. In the long run, it is not going to matter whether you invested with Sensex at 32,000 or 30,000, but whether you invested in equity at all. Another good option is investing with a Liquid to Equity Systematic Transfer Plan (STP) over 20 weeks.

REVIEW ASSET ALLOCATION – As exciting as the markets may seem to enter into equity or as scary as they may seem to exit, do not violate your asset allocation. If your pre-decided Asset Allocation has altered because of the market correction, use this opportunity to re-balance it! If you have been investing without keeping asset allocation in mind, use this opportunity to start and become a better, more disciplined investor.

It is always advisable to speak to a Financial Advisor who can provide the guidance and support needed through these turbulent times and walk with you on your financial journey towards a secure future.