The novel coronavirus (COVID-19) pandemic has been a personal finance refresher for me. It strengthens my belief that every crisis teaches you something. The following are the four things about personal finance that I learnt during the pandemic .
Have a contingency fund and focus on asset allocation
It is a must to have a contingency fund for unforeseen circumstances. The fund should be invested in risk-free and highly liquid vehicles like bank fixed deposits or a liquid mutual fund. Ideally, the fund should be equal to six months of your monthly expenses. However, we should strive for a reserve of at least four months.
Secondly, I learnt the importance of asset allocation amid the crisis. It is never advisable to invest all your money into one asset class, especially equities. While equities deliver the highest returns over the long-term, they are also quite volatile in the short-term. Having money spread across different assets delivers better risk-adjusted returns over the long-term. This also helps in reducing stress. Imagine seeing all your investments going down in a financial crisis. In a worst-case scenario, you might also have to sell your investments at a loss to meet your needs.
You cannot time markets
Third, even the best of fund managers cannot time the markets. As the old saying goes, ‘time in the market is more important than timing in the market’. In the current crisis, many mutual fund investors are cancelling their SIPs while some are withdrawing funds. That is possibly the worst thing to do and goes against the rupee averaging principle of SIPs. Also, exiting your equity investments now would mean selling low. Equity markets always go through such cycles and the current markets are a buying opportunity. Remember what Warren Buffett said, “Be fearful when others are greedy, and be greedy only when others are fearful.”
Purchasing insurance is a must
Finally, I learnt the importance of insurance in both life, and health. With the world suffering from a high scale epidemic, it is important for us to take due precautions to protect ourselves and our families from the virus. As an extension, a health emergency can occur anytime without forewarning. It is therefore imperative to have a health insurance cover