July 3, 2020
Someone’s sitting in the shade today because someone planted a tree long time ago – Warren Buffett.
In a brief period of 3 months, this year already feels like a decade. Heightened geopolitical tensions in Middle east leading to #WWIII trending on Twitter, sudden rift in the OPEC-Russia possibly precipitating into a long term price war and a health crisis which has brought the world economy down on its knees.
Being an investor has been tough during these times, with little to no clarity on any resolution (rather, cure / containment in this case). We repeat our previous update, that such times require discipline and one needs to stick to asset allocation to tide through such turbulence. Time and again history has shown us – no matter what equity markets deliver in the long term.
However, maintaining this disciplined approach in equity can be difficult in such periods if investment plans are not holistic. On that note, today, we want to draw your attention to a portion of portfolio, which is often ignored – Emergency Funds.
At the risk of sounding too grim, we will try to paint a picture to highlight the need of a fund for financial security. As countries realise that a cure / vaccine to Covid-19 may be sometime away and “flattening the curve” is the best solution today, the world will see more lockdowns. In India too, we are currently in the midst of a 21-day lock down, and a looming uncertainty on timeline for normalcy being restored in directly affected industries like hospitality and tourism. Even as we battle this health crisis, we need to be cognizant of the potential financial impact this is going to cause.
At such times, it helps to come back to basics of personal finance. Emergency fund or Safety pot is the sum one sets aside to fall back on when a rainy day comes. It is meant to give you that financial security during tough times.
How much is enough
- Here, we are looking to compensate for loss of income. One should aim for unexpected expenses (like medical) to be covered largely through insurance
- While it is more subjective to each individual, but on an average 6 months worth of one’s expenses should be sufficient.
Where to invest
- This is important as emergency funds should be invested so as to be available at short notice (within 0-7 working days), minimize volatility and target to provide inflation beating returns on post tax basis
- In our opinion, a combination of Savings Account, Liquid funds and Arbitrage funds works best
We are happy to discuss this in detail and do accept that it takes time to fund your safety pot, but such periods surely highlight its importance.
