Be flexible with your financial plan, don't make big commitment

Clearly, these are unusual times. So, things need to be done differently

Sanjay Kumar Singh, Business Standard
21st April

Starting the financial year 2020-21 amid a lockdown and threat of salary/job loss wasn’t part of the plan for most professionals. Worse still, within a span of a couple of months, your investments in equities would have eroded by at least 25-30 per cent, or even more, if you dabbled in high-risk mid-and small-cap stocks. Interest rates in the debt market are under severe pressure. So, fixed deposits or debt mutual funds are unlikely to give spectacular returns. And not just that, there is credit risk because of possible defaults by companies.

Deepak Parekh gave this mantra to builders on Tuesday — compromise, compromise, compromise. Most working professionals may have to follow the same mantra. Clearly, these are unusual times. So, things need to be done differently.

Reset goals: Begin by checking whether you actually saved and invested as much as you had planned to last year. The target should be to save and invest at least 30 per cent of one’s take-home salary. But if there is a threat of a salary cut or job loss, you may have to compromise on this. So, if need be, take a break from investments, though it is not an ideal situation.

Of course, there are opportunities. The three major market cap indexes — large, mid- and small—are down 21-32 per cent over the past year. “The correction means you would have fallen behind on your goals. You will have to either save and invest at an accelerated pace, or push your goals back by a couple of years,” says Avinash Luthria, a Sebi-registered investment advisor and founder, Fiduciaries. For those who have suffered a salary cut or job loss, investing more may be difficult in the near future.

Alternatives may have to be considered. For instance, if your child plans to go to college abroad and you were earlier thinking of funding the entire expense, now you may ask him to look for scholarships or take a loan.

The steep fall also means your allocation to equities would have fallen below its pre-set level. “Try to bridge that gap as it is crucial to stay aligned to your original asset allocation,” says Anil Ghelani, head of passive investments and products, DSP Investment Managers. As for how to achieve this, Sousthav Chakrabarty, co-founder and chief executive officer, Capital Quotient, says: “Keep your SIPs going, but any incremental money you have should be directed into equities.” Your allocation at the sub-asset level may also need tweaking. “When the market recovers, large-caps will lead the recovery. Trim your mid- and small-cap exposure and move more money to large-cap active or index funds,” adds Chakrabarty.

Choose your tax regime: The Budget had introduced a new, alternative personal tax regime that offers lower tax rates, but does not permit a number of tax deductions and exemptions available under the old regime. According to a circular issued on April 13 by the Central Board of Direct Taxes (CBDT), salaried employees need to declare in April itself which regime they will go with so that their employers can start deducting tax at source accordingly. Once you have chosen a regime, you will not be able to change it with your employer for the purpose of tax deduction. However, you will have the option to change it at the time of filing your tax return. “Suppose that someone goes with the old regime and makes all the tax-saving investments he plans to do. At the end of the year, he can once again evaluate with the help of his advisor which regime makes more sense,” says Archit Gupta, founder and CEO, ClearTax. Even if he opts for the new regime, there would not be any real loss to him if he has chosen his tax-saving options (like PPF, ELSS, medical insurance and others) wisely.

Keep more liquidity: One change that you need to make owing to the COVID-19 crisis is to have more cash in hand. “Consider the possibility of a medical crisis during a weekend. The liquid emergency money should be accessible to your spouse also,” says Luthria.

Buy adequate life cover: If you have begun earning, consider buying term insurance right away — in anticipation of the fact that you will have dependants and liabilities in the future. The premium for term insurance is lower when you buy it at a younger age, and it remains constant for the entire tenure. As for how much term insurance is adequate, Santosh Agarwal, chief business officer, life insurance, Policybazaar.com, offers a rule of thumb: “People below the age of 40 should buy a sum assured equal to 15-20 times their take-home salary. Those above 40 should have a sum assured equal to 10 times. Since your salary tends to increase with age, a 10x cover tends to suffice after 40.”

Younger people who do not have an adequate sum assured should bump it up, if during the previous year they have got married, had kids, or if they have taken on a large liability, like a home loan. At the time of purchasing a term cover, take the Married Women’s Property Act (MPWA) option. “Suppose there is a large loan outstanding at the time of death. Buying this option means the lender will not be able to take away the life insurance money received by your spouse,” says Agarwal.

Don’t rely on group health cover: The current crisis has also brought home the need to buy adequate health insurance. “If you are only covered by a group health policy, buy a separate cover of your own for your family,” says Prasun Sikdar, MD and CEO, ManipalCigna Health Insurance. Remember that the loss of a job also means loss of the group cover.

Try to buy the maximum cover you can afford at the earliest age. “Most people think they will augment their cover as they get older. But companies may not be willing to hike the cover once you get older,” says Luthria. A Rs 10 lakh cover for an individual and a Rs 20 lakh cover for a nuclear family is a good starting point. Sikdar suggests opting for a super top-up to increase one’s sum insured as this is a more affordable option.

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A few links for further reading

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The great Indian dream of settling abroad is achievable if one has a few crores to invest. Rich nations offer a variety of investment options in a quid pro quo arrangement: immigrants get a better quality of life and revenue from them helps these countries’ finances. Wealthy Indians, troubled by polluted cities and the red tape holding up entrepreneurship, may want a quick ticket out of the country. Sanjay Kumar Singh lists a range of options: from a Canadian province’s investor programme to America’s US EB-5 plan.

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