Young & Salaried? What to do with SIPs, loans and how to create emergency fund during COVID-19

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Updated: May 20, 2020 4:42 PM

This is what industry experts are suggesting to tide over the current financial situation that many might be facing.

 personal finance, mutual fund, SIPs, loans, COVID-19, Personal loans, credit cards,Pay Cut During Lockdown: Avoid the moratorium for credit card payments and access it as the last option since accrual of interest could be stressful.

Job Loss Due to Coronavirus in India: There has been a visible impact of COVID-19 on the personal finance of most individuals. With pay-cuts and job losses, the immediate impact has been on the servicing of loan EMIs and investments as well. Further, many investors may be considering to either stop their mutual fund SIPs or even make an exit from the market.

Let us see what some of the industry experts are suggesting to tide over the current financial situation that many would be facing.

Mutual fund SIPs

As far as your goals are concerned, if they are still a few years away, continuing with SIPs will actually help. There is no way to find out how the markets will react in short to medium term. “Volatile markets and negative portfolio NAV’s are hurting investor sentiments. While some investors are shying away from further investments, pausing SIP’s during market downfall is not a good plan. This is the best time for investors to gain from rupee cost averaging by gaining incremental units at lower costs. SIP’s with a long-term gain in mind should be continued for maximum benefit especially in times of market lows,” says Tarun Birani, Founder & CEO, TBNG Capital Advisers.

However, what if there is a pay-cut and one is struggling to make ends meet. “Pay-cuts may necessitate a change in SIP amount. It is important to revisit all the financial goals and their priority. Ensure that SIP amounts for near term goals are maintained so that they are not missed. Longer-term goals can be managed with reduced SIP as there is time to recover the lost ground,” says Rahul Jain, Head- Edelweiss Personal Wealth Advisory.

Here’s a word of caution from Vijay Kuppa, Co-Founder, Orowealth, “SIP’s are being continued for now but if the lockdown persists and there are massive layoffs it may impact cash flows which in turn may have an impact on the continuation of SIP’s.” But, here’s what Kuppa adds, “In case of a turnaround in the economy, the investor is bound to gain and get good returns over a period of time.”

Credit cards spending

With lockdown in place, for many individuals, the expenses incurred through credit card would have been lower than earlier. It’s time to consolidate your debt and repay all dues on the card. For those who are facing pay cuts and job losses, its best to first completely pay-off the outstanding dues. This will help to avoid falling in the debt trap in future as the interest rate on rolling over the dues is around 42 per cent per annum.

“Adhere to cautious spending alone and avoid the use of credit cards for anything other than essential expenditure. Track your auto-debit expenses on your credit card to avoid any surprises at the end of the month. Avoid the moratorium for credit card payments and access it as the last option since accrual of interests and a cumulative payment at a later date could be stressful as interest rates on the credit card are highest,” says Birani.

Personal loans option

After pay-cuts and job losses, there could be several discretionary expenses which could have come down. “This is a historic event, impacting businesses as well as customer behaviour. Discretionary consumption, that was previously happening across multiple categories like eating, shopping, and travelling, both domestic and international, has come to a standstill,” says Anup Seth, Chief Retail Officer, Edelweiss Tokio Life Insurance. However, one may still have to buy white goods etc for the household. And, to tide over the adverse financial situation, one may resort to getting a personal loan.

“Personal loans should be taken to meet any short term money requirement. As a thumb rule, always take a loan only when you are sure of repaying the capital and the interest charges. Any delay in repaying, impacts your credit score, so be wise and take a loan keeping in mind the repayment plan,” says Saurav Basu, Head, Wealth Management, Tata Capital.

However, if one is taking a loan to tide over the financial crunch, more caution is required. Birani says, “Personal loans should be availed of in dire circumstances where there is an income or temporary liquidity mismatch. Banks are doling out Covid-19 specific personal loans to borrowers who have a salary or pension account with the bank. The rate of interest is far lower between 7.2 per cent to 10.5 per cent per annum in comparison to regular personal loans and covers an amount between Rs. 25,000 to Rs 5 lakh.”

Emergency funds

For those who haven’t got the emergency fund in place, this situation created by COVID-19 outbreak could serve as an opportunity to build an emergency fund. The emergency fund typically helps to tide over situations such as job-loss or medical exigencies. Most financial planners suggest keeping a fund that can help you meet six months of household expenses including the amount to meet financial goals.

Jain suggests, “Emergency fund should be kept in a separate bank account or liquid funds. Safety of capital over returns should be the guiding principle for investing this fund. It is true that few debt funds have given negative returns but that does not mean these funds have completely lost their relevance. It is important to check the fund portfolio before investing the money in the same.” Kuppa adds, “Since the objective of this fund is safety and not growth, Liquid or Overnight of high rated AMCs funds are advisable.”

The times are changing and one needs to get accustomed to the new way of life until things stabilizes. One’s focus should be on savings while keeping the long term goals on track. “Given the likely impact on future cash flows with salaries expected to remain the same or even lower, people are now focusing on providing for their future goals and aspirations. Simply put, customer behaviour is shifting from discretionary spending to a planned and goal-based approach,” says Seth.

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