7-steps to take control of your finances post pandemic

Emergency Funds

Investors are caught between a rock and a hard place nowadays.

Many are forced to dip into their retirement savings to meet medical emergencies. Others are forced to keep their investment plans on the backburner because of reduced income and the rising cost of living.

What’s more damaging for your financial wellbeing—missing loan EMIs or discontinuing SIPs?

Unfortunately, it’s not an either/or choice. The implications are different for both these actions.

Missing an EMI can have instant consequences—your credit score may go down and getting a loan could become a tough task in future. When you miss an EMI, you immediately get on the wrong foot with the bank.

When in difficulty, many of us resort to the easiest option, which in today’s context is to stop SIPs.

You can’t discontinue your insurance policy abruptly, since there can be a severe financial loss, depending on the policy terms and conditions. In contrast, discontinuing an SIP doesn’t leave any such immediate adverse impact on your finances.

Nonetheless, it can be equally painful in the long term. When you discontinue an SIP, you potentially compromise on your retirement savings. It may even land you in an uncomfortable financial situation in your old age. 

Financial emergency isn’t the only occasion for which investors relinquish their SIPs.

Many investors believe that they should stop SIPs when markets are near their peak or look overbought and exhausted after a long run up.

Even at present, some investors seem to be mixing up things—with the rising market and increasing uncertainty around COVID-19, they are simply shunning their mutual fund SIPs.

Are you wondering what happens when you discontinue your SIPs? The simplest answer is, you end up reducing your retirement savings pool. By how much?  That depends on for how long you opt out and whether you step up your investments to make up for the shortfall when you restart/resume.

To get some more clarity on this, let’s take an example.

Assume you started an SIP of Rs 10,000 per month in a Sensex-linked index fund in April 2001. Units bought on the 5th of every month for the last 20 years would have fetched 13.4% compounded annualized returns.

For the sake simplicity and better understanding, assume the tracking error of the fund was zero and there were no costs involved, i.e., the fund precisely matched the returns of S&P BSE Sensex all these years and the fund charged you zero expense ratio.

Discontinuing an SIP of Rs 10,000 could cost you Rs 8 lakh

Emergency Funds

For illustration purpose only based on the actual returns generated by S&P BSE Sensex over the last 20 years. In both the scenarios the SIP was started on April 05, 2001 and ended on March 05, 2021.
Under scenario 1, no SIP installment was missed.
Under scenario 2, SIPs were discontinued between January 2008 and December 2008; January 2015 and December 2015 and January 2018 and December 2018; i.e. when markets appeared overheated

When you stop your SIP…

Discontinuing mutual fund SIPs is the easiest way out to manage other monitory commitments, but that’s certainly not the best option.

The biggest disadvantage of discontinuing an SIP is you often lose the crucial rupee-cost averaging benefits and end up trying to time the market. Imagine how crucial the period between January 2008 and December 2009 could have been for investors. The markets presented some of the best buying opportunities during this period. We almost had a déjà vu moment early last year. How wise would it be to miss such opportunities?

Some timeless benefits of SIP are:

  • SIPs help you build monetary resources for fulfilling your life goals
  • They demonstrate the power of compounding
  • SIPs inculcate the habit of savings in you
  • They make market timing irrelevant
  • You are always in a driving seat if you start early and continue with your SIPs

Roadmap to restart after the pandemic…

  1. First, set aside an emergency fund that can take care of 6-8 months’ of your expenses. Don’t take personal loans to tide over emergencies. They can harm your long term financial health.
  2. If you haven’t already opted for medical insurance cover, it’s time to get one and that too, for an adequate amount.
  3. Make sure that you are not missing any of your loan EMIs. If you have missed any during the second wave or even before that, discharge the dues as soon as possible.
  4. Don’t discontinue your SIPs. They help you build your financial future.
  5. If you are planning to stop your SIP just because you feel markets are near their peak and the outlook is bleak, we strongly suggest you to stay put. Markets are always volatile, when they were not?
  6. Restart your discontinued SIPs as soon as possible.
  7. If you haven’t discontinued, go for a top up. After all, you shouldn’t miss any opportunity to compound your money.

Editor’s note

If you are trying to regather your investment portfolio from the lingering shocks of the pandemic and need any guidance to take well-informed investment decisions, you may reach out to us @ mfcustomercare@ventura1.com.

You may also like to read: Profit Booking or Market Timing – What are you doing currently?

Please note (Read as a disclaimer): The blog is for information purposes only and anything mentioned herein shouldn’t be construed as financial/investment advice in any form.  The only purpose of this coverage is to create awareness amongst investors. Please consult your financial advisor before taking any decision pertaining to your finances. Investing in mutual funds is subject to market risks, please read the scheme information documents carefully before investing.

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

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