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Financial Strategy: What does it really take to build a Covid-proof financial portfolio


By Raveendra Balivada

It is with a lot of trepidation that many of us are getting ready to gradually exit the lockdown and expose ourselves to the risks as we get back to economic activity. Under these circumstances, we are being advised to take utmost care to protect ourselves mainly by building our immunity from within and taking external precautions.

Building Internal Immunity

This is perhaps the most important line of resistance. Through a combination of healthy diet, adequate rest and regular exercise we attempt to build our body into a fortress that can resist any external attack. And if by chance we do fall prey to the virus, our immunity is strong enough to fight it and bounce back quickly.

Similarly, our financial portfolio needs to be inherently strong. Having the right asset allocation, i.e. the right mix of equity, debt and alternate investments, is perhaps the single-most important factor in determining the success of a financial strategy. This ratio can be derived through a combined assessment of the risk profile of an investor as well as the time horizon to important financial milestones such as an education goal or buying a house, which would require large allocations to be set aside for the purpose.

Asset allocation ensures that a portfolio is adequately diversified and skewed towards any one asset class. For instance, a portfolio heavily skewed towards equity would have shown a marked underperformance over the last few months as compared to one that has a good balance of equity and debt. Similarly, one with a high exposure to real estate would have not only seen a stagnation in returns and high maintenance costs, but also total illiquidity which may become an impediment and cause anxiety at the time when important financial goals are imminent.

A portfolio with a good asset allocation mix not only ensures adequate liquidity, but is also able to withstand external shocks and provide optimal risk-adjusted returns.

Taking External Precautions

Most of us have been at the receiving end of innumerable advices on the precautions we need to take while moving out or performing our daily activities. Social distancing, wearing a mask at all times, disinfecting our hands and work surfaces regularly are some of the measures that have become an absolute necessity.

Likewise, we must safeguard our portfolio by taking adequate risk protection measures to ensure the health and hygiene of our finances. This is primarily related to:

Contingency Planning: We need to make sure that we set aside a contingency fund of 3-6 months expenses in a manner that is liquid and easily accessible to us in times of emergency. It could be a medical situation, or like in the present circumstances, a period of economic uncertainty where one is faced with the prospect of pay-cuts or job loss.

Maintaining a contingency fund can help you weather the storm during a crisis and provide financial support till the situation returns to some form of normalcy. Typically, the funds can be parked in your savings a/c with a sweep-in FD or in liquid funds.

Medical Insurance: One of the most crucial financial lessons learnt in present times is the importance of having adequate medical insurance for the entire family. With the cost of medical treatment and hospitalization expenses shooting up over the years, it is recommended that every individual have a minimum cover of Rs 5-10 lakh depending on age, pre-existing conditions, hereditary factors, etc.

A top-up cover can be taken to enhance the overall cover in a cost-effective manner. Additionally, a critical illness cover and personal accident policy can also be considered. The absence of a comprehensive medical cover would lead to exhausting one’s savings during a medical emergency, thus derailing the overall investment plan and jeopardising the accomplishment of one’s financial goals.

> Life insurance: Life insurance provides financial protection to a family as a replacement of income in the event of the unforeseen death of the breadwinner of the family. According to a study conducted in 2019 based on government and industry data, up to 988 million Indians or 75% of the country’s population (which is more than the population of Europe) do not have any form of life insurance.

The unexpected loss of a loved one can be extremely traumatic for a family, and their ability to cope with the situation can become all the more challenging if they are not financially provided for. Hence, the importance of having a substantial life cover cannot be overemphasized.

In line with current lifestyle expenses and the inflation trajectory in India, a minimum cover of around Rs 2 crore is recommended for an individual with dependents and the most effective way is through a term plan, which can provide a relatively large cover with a small premium.

Human life value (HLV) calculators are commonly available online and help in determining the exact amount of life cover needed based on one’s age, income, expenses, liabilities and future goals. In cases where both, husband and wife are contributing to the household income, it is essential that both partners are adequately covered.

The policy term should continue till one’s working years; however, several companies now are offering tenures till the age of 80 years, albeit at a higher premium.

Over and above all these, it is important to maintain a holistic approach towards long-term wealth creation. Markets are likely to be volatile from time to time, but with these safeguards in place, your financial portfolio will be able to better withstand any external shock and one must refrain from panicking or making knee-jerk reactions.

Just as we do annual health check-ups, it is equally important is to consult your financial adviser and review the portfolio on a regular basis to check for red flags or weed out underperforming investments.

(Raveendra Balivada is Head of Investment Advisers at HDFC Securities. Views are his own)

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