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Investing under Corona cloud: Not following basics of financial planning may land you in trouble

With equities and equity-oriented mutual fund (MF) units becoming cheaper, there may be good opportunities to invest, but it’s important to follow financial planning basics before investing.

Investing under Corona cloud: Not following basics of financial planning may land you in trouble
The Covid-19 outbreak has highlighted the importance of following the basics of financial planning.

With the economic activities coming to almost standstill due to the nationwide lockdown to contain the spread of highly infectious Novel Coronavirus Covid-19, stock markets nosedived sharply on weak economic outlook. With equities and equity-oriented mutual fund (MF) units becoming cheaper, there may be good opportunities to invest, but it’s important to follow financial planning basics before investing.

In fact, the Covid-19 outbreak has highlighted the importance of following the basics of financial planning.

Emergency Fund

The most basic of a financial plan is creating an emergency fund, which would depend on the number of dependents and their health and financial status. For example, if a person has his parents, wife and children with him, the size of emergency fund will depend on the health condition of parents, if both or any of them get(s) pension or not as well as if the wife is an earning member or house wife.

If parents are healthy and get pension, the lesser amount may be set aside as an emergency fund in comparison to unwell and financially dependent parents. Similarly, a larger emergency fund would be needed if the spouse is a housewife, in comparison to an earning wife.

A person should keep at least 6 months of his/her income in an emergency fund with sufficient liquidity, which may go up to one year income, depending on the nature of dependents.

As the Coronavirus outbreak has created uncertainty on regularity of income, the need of creating an emergency fund has become more important.

Insurance

Once the emergency fund is created, you should take insurance cover to transfer the financial risks to insurance companies. Depending on risks, there are various kinds of insurance – life insurance, health insurance, personal accident insurance, motor insurance, fire insurance etc.

With the news of the Covid-19 outbreak all around, having a health insurance policy with adequate cover gains more importance than ever.

The worldwide death toll due to Covid-19 infection has become over 1 lakh and is still increasing, highlighting the importance of having sufficient life insurance cover.

Before assuming any investment risk to meet future financial goals, one should first cover his/her own life and financial risks through insurance.

So, it’s very important to take these two basic financial planning steps before you start investing according to the financial plan, else investing all your money to get larger return would land you in serious trouble.

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First published on: 13-04-2020 at 20:38 IST