A lot has changed this year. When it comes to personal finance, the year was full of learnings; more so because of the Covid-19 second wave that ravaged lives across the country. The year taught everyone the significance of having control over his/her personal finances.
The year also presented individuals with several new opportunities to grow their wealth. After the damages of the second wave of the pandemic, came a bull market like never before.
Here’s a look at some of the top personal finance moments and lessons from 2021 that you should know before entering 2022.
Awareness on health and insurance policy
Having a life cover with term insurance is one of the safest ways to secure the financial future of one’s family. Experts believe that it is important to start term insurance at an early age to avoid hefty premiums. It is also important for one to have an adequate health insurance cover (including for family) which could come in handy during an emergency hospitalization.
“During the surge in cases in the first and second pandemic waves, a lot of families had no choice but to use up savings meant for education, marriage and other big-ticket expenses on hospital bills. This made individuals realise the importance of health insurance. It is now an element of personal finance; prior to the pandemic, it was primarily employed as a tax-saving strategy,” Ajinkya Kulkarni, co-founder of Wint Wealth told FE Online.
Living with Covid-19: Keep contingency fund ready
Despite the Delta wave in the first half of the year, the country remained open for the major part of the year. As we enter 2022, there is a mounting risk from the new Omicron variant. The pandemic can end in one of the two ways, either we achieve “zero Covid-19” or the disease becomes an ongoing part of the infectious disease.
Experts say that societies will have to adapt to living alongside Covid-19. Therefore, for every personal finance plan, having a contingency fund ready for emergency purposes is a necessity, now more than ever.
Volatile Markets: Hold on, diversify investments
As markets corrected after touching the highs and losses starts to loom, it becomes difficult to avoid taking emotional decision to cut these losses. This mistake can be detrimental to creating long-term wealth.
“Your first defence against these mistakes is to craft a diversified portfolio across different asset classes that match your investment horizon and risk tolerance. During times of market volatility, while your risky investments – equities (domestic/global) may fall, the overall portfolio performance may not be so badly impacted. A diversified portfolio built of complementary assets helps you smoothen out the returns in volatile times and helps mitigate risk in the portfolio,”Kumarpal Jain, Assistant Vice President of digital wealth platform Fintso told FE Online.
Increase in investable surplus for retail investors
With the economy gaining some sense of normalcy, 2021 saw an end to salary pay cuts in most industries.
“Teamed with work from home and recurring lockdowns, the common man was faced with an unusual situation – surplus of passive saving and limited avenues to spend. In 2021, retail participation grew at an exponential rate, the continuous bull market wave is a testament to this,” said Kulkarni.
Demat accounts doubled in last 3 years
A huge chunk of the flow of this newfound increase in investable surplus saw its presence in the stock market. According to a recent report by SEBI, the number of Demat account holders has more than doubled in the last three years, reaching 7.38 crore as of October 31. This led to India’s mutual fund and Demat account holders outnumber Registered Investment Advisors (RIA) by a ratio of approximately 76,510:1.
RBI opening sovereign debt market
The government launched RBI Retail Direct Gilt Account that allows retail investors to invest directly in government bonds.
“Allowing retail investors to create accounts directly with the RBI rather than through a bank and providing a free service is a commendable move by the central bank. G-secs were previously only available to retail investors through traditional insurance plans or gilt mutual funds. The scheme saw a lot of attention from NRIs as they found it to be a good secure debt option.
Avoid speculative betting; work for long-term wealth
Some of the cryptocurrencies have seen a meteoric rise in their value in 2021 giving many a FOMO (Fear Of Missing Out). The temptation to create wealth in such a short span of time led many to consider investing in these digital currencies.
However, experts say it is important to understand that cryptocurrencies are highly volatile.
“Bitcoin, the top cryptocurrency by market capitalization, touched an all-time high of $68,990 and soon later had a dramatic fall of around 32%, reaching a bottom of $46,584. Also, some of these digital currencies are highly vulnerable to government regulations and social media tweets. We believe it is in the best interest of the investors to avoid such speculative bets and focus on their long-term wealth creation plan by topping up their investments when they have the feasibility to do so,” said Jain
As per the recent data released by the RBI, the total value of transactions done through credit cards crossed Rs lakh crore in October 2021. Banks charge roughly 2.5-3.5% per month if you have not paid the outstanding amount in full. Thereby, in case if you have any outstanding amount pending, your priority must be to pay off your credit card bills.
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“However, not all types of debt are bad. Money borrowed to buy a house or education loan can help you create a long-term asset. The goal must be to borrow what is truly needed and as little as possible,” said Jain.