Importance of Liquidity

The recent pandemic has left the whole world on brinks of Global recession. These are the crisis about which Financial Planners keep on warning about. Although something on this scale where the whole world is on stand still has happened after World War II. For almost 45 days everyone was sitting home with ‘No business or any income’. There are still many businesses which have not opened. Businesses which have opened are doing slow or no business. At this time unless you are in essential services businesses are slow. It is an unexpected crisis which can unfortunately last for a year.

During times like this everyone to whom I have talked to can’t stress enough the importance of liquidity.

Individuals who are sitting with liquidity are better off. The key word here which needs to be pointed out is ‘Liquidity’. The coming two years are going to be difficult for everyone and liquidity is what one needs to have a focus on. There is an ideal Liquidity ratio which in normal times is recommended – ’15 per cent’, that Is at any given time at least 15 per cent of your portfolio has to be liquid funds. Liquid assets are ‘The assets from which within three to four working days you can liquidate your money’. List of liquid assets –

  • Mutual Funds
  • Fixed Deposits
  • Company deposits
  • Gold
  • Silver
  • Stock Market
  • Savings account and
  • Cash in hand

These liquid assets are over and above the emergency fund which you have kept aside to meet emergency needs like in the recent months.

The coming year is going to be difficult for every one of us. It is best to have liquidity in hand during these tough times. For the coming year, recommend to keep at least 25 per cent of your portfolio in liquid funds.

Remember investing in Mutual Fund equity funds or in stock market your horizon has to be of more than 5 years. So the extra exposure of 10 per cent has to be in non-volatile assets like Fixed Deposits or a Short Term Liquid Fund.

Reviewing the portfolio every three months is important. Once the world sails through the current crisis make sure to revaluate your plan, your goals, and your portfolio and take a wise decision!!

Life post Coronavirus or Rightly saying Finances after coronavirus

Emergency !!!!!  there is only one thing going around in News, Social media or in any conversation, we have with anyone now a days.  – Coronavirus or infamously known as COVID – 19 has wreaked havoc in everyone’s life.  In fact now people are scared even to sneeze or randomly cough in public in fear of being ostracized.  Along with the health concerns, the financial ramification of this virus is also worrying everyone. Moody’s predict that we might never come out the economic ramification of this virus. And top leaders of our country passing statements that we will be going back by 21 years in this 21 days lockdown, definitely dampens everyone’s spirits. With countries being in lockdown and markets and businesses being shut down everywhere, there is an almost certain global recession looming large in the future. These are exactly those emergency times for which Financial Planners warn people to be prepared for.

We can’t do much about the medical emergency of this virus, but we can definitely create a plan for the financial emergency which we are facing today and for the uncertainty looming about our near future –

Assess your current situation – with businesses shutting down, it is hard times for all of us for a foreseeable future. Assess your financial situation. How much liquidity do you have with you right now and how much will you need in the near future to tide over this crisis? With government announcing Three Months Moratorium you might say nothing to worry. But would disagree as if you have liquidity would recommend to continue your loan and not take moratorium. And even if you opt for a moratorium trust me this problem is not going to vanish overnight. It is always best to be prepared. You need to be prepared for at least the coming three months. So make a list of your mandatory expenses –

  • EMIs of loans or Rents
  • Insurance premium
  • Utility Bills – electricity, water and phone.
  • Daily essentials
  • Credit card dues

You need start accounting for these above expense heads and multiply it by times 2 or 3 and then assess whether you have enough funds to cover these basic expenses for at least the next 2-3 months.

Talk with your bankers (or Landlords)– everyone were relieved when RBI announced a three month Moratorium that is from 1st March to 31st May 2020. ( What is a Moratorium – A legal authorisation to debtors to postpone payment.) Moratorium of the loans which includes all types of loans including credit card dues. But you need to understand that your interest is getting accrued and will be payable either as EMI or your tenor will accordingly increase along with slight increase in your EMIs. Do check with your banks as to how are they planning to give the three moratorium and how are they planning to collect these dues. Same goes for credit card dues. Penalty will not be charged but interest will keep on accruing. If you have liquidity with you do not take the moratorium. Keep on paying your loans and finish it off. If you have limited liquidity would recommend to finish off credit card dues. Remember even if you opt for moratorium it will not affect your credit ratings. Same way talk with your landlord for rent payments. In a few states landlords are requested to go easy with rent. Talk with the landlord and work out a payment schedule.

Investments continue hold or sell – many an investors do not know what to do with businesses on hold and for how long no one knows. If you have Systematic Investment Plans (SIPs) going on analyse your situation and take a call as to whether you want to temporarily stop them or you can continue without any strain on your finances. But please do restart them once your finances are back on track. Same goes for all your investments. Do not let this detour from financial independence path become a permanent detour. Once your life is back on track better to do a complete financial check up to see where you stand and the way forward.

Do not panic sell – remember do not panic sell your investments. In case you are short of liquidity then it is a different scenario but please avoid PANIC selling.

Check with your insurance agent – check with your medical insurance agent regarding the diseases covered in your medical insurance. If not how much is covered and what can be done. Again, be it whatever do not let your insurance lapse. Be sure to pay the premiums on your insurances.

Involvement of family – do not bear the stress of finances alone. Sit down with your family. Discuss your finances with your family. This exercise has a dual advantage – 1 – sharing helps with your stress and you can work as a family to lessen your financial burden. 2 – In case you fall sick, your spouse or family member is updated with all the financial matters and can take it in their hands.

Emergency funds – last but not the least if you already have an emergency fund or liquidity in place then you do not need to panic. But if you do not have one, then although a little late but not everything is lost. With talks about extension of lockdown its still not late to create an emergency fund.  How much should your ideal emergency fund be? After calculating your existing finances and expenses, we would recommend to keep aside at least two months worth of sum equivalent to your EMIs of loan and insurance premium and utility bills and any unforeseen expense that can arise during this period. Even if you have taken moratorium of EMIs but still after three months the load will be there.  (Although you need to keep aside cash equivalent to all the above heads mentioned but if liquidity crunch then even keeping aside money for EMIs and utility bills and insurance premium.)  Ideal is three months but with the entire economy at halt and would recommend to start with two months. Once you are through this rough patch, always remember to keep aside an emergency fund.  A word of caution – ‘ Your emergency fund is not an investment, it is an insurance with one purpose – to protect you and your family’ as rightly said by Dave Ramsey an American, show host, businessman and author. Do bear this in mind.

Remember always be prepared for emergencies, as emergency itself means something which is not in our hands.  Be safe everyone – Physically and Financially !!!!

Budget should you worry or invest wisely – finale

Budget should you worry or invest wisely

With budget around the corner and a sluggish economy, everyone is worried and eagerly waiting for the Finance minister to dish out something exciting or wave a magic wand and make everything oki!! Everyone is hoping for a tax cut or some other similar gifts. But the irony is without tax income how do you expect the government to increase spending for infrastructure and how to do you expect the government to infuse much needed money into the economy.

So how does Tax revenue affect growth?

The last two years, that is 2018-2019 and this current year, the tax revenue has decreased considerably.  In fact this year for the first time in two decades, there has been a fall in the direct tax collection. Direct taxes account for almost 80 percent of the total tax collection.  As per reports as published by the Economic times – The Income tax department has been able to collect Rs 7.3 trillion till January 23rd which is 5.5 percent below the amount collected same time last year. The Government was targeting at collecting Rs 13.5 trillion but with the decrease in the businesses cycle, this target looks unachievable.  The effects of this can be seen on government spending as well.  In the current scenario, without government spending, the revival of economy seems difficult.  Also, indirect taxes are out with coming of GST whose committee meet every month to analyse and bring out reforms as and when they seem necessary which has been far and wide and with time, the GST reforms are settling down and hence less changes happen over time.

What has tax collection should concern you regarding your investment decision?

PROBABLY NOTHING.  Although decrease or increase in income tax affects investments amount but tax rate cuts or increase should not affect your investments decisions.  Why –

  • Achieve goals – why does a person invest? Reasons can be numerous like buying a house, car, retirement, children or in general being rich. SO your investments are decisions which are based on achieving these goals and not on budget.
  • Insurances – an individual will always require medical and life insurances; budget or no budget, slow down or no slow down. You already have a tax benefit for this category and trust me, no finance minister is going to take away tax benefit on insurance premium paid. So an individual planning on renewal of medical insurance or buying new policy, should not be waiting for the budget but should just go ahead.
  • Emergency funds – emergencies come unannounced and one always has to be prepared for it. How – by keeping at least three months worth of cash’, equivalent to your mandatory expenses, aside in liquid assets. In other words, funds that are readily available. Will budget change your decision about keeping aside emergency funds?,    Even for selecting the liquid asset for investing, budget should not be a factor in your decision.
  • Retirement – retirement planning is a long term planning, especially for individuals in their 20s, 30s or 40s. You should be looking for something like a long-term Systematic Investment Plan (SIP) or investment in assets like real estate. This decision should never be based on budget, as you cannot predict every years budget’ and the changes it will have on your asset class, and churn the portfolio accordingly. In fact you will stand to lose out more than gain with such a strategy.
  • Investments – where to invest, what to invest in, how long to invest, these are all variables which are in your control and which has to be aligned with your needs and goals and not with external factors such as Budget.

This years budget is much awaited and hyped due to slowing economy and there is hope that there will be certain announcements that will make business environment more conducive to growth and consequently result in better cash flow in the our hands.

That being said, Budget is not a magic pill that can solve problems overnight.  These are problems that plague the world and are not just ours.  It will take time to get back on its feet.  Till then we have to more concerned about our own financial goals and needs and undertake investments based on these and not what the Budget has to offer.