Sanitising Your Portfolio

Volatility is often considered the hallmark of equity investment. The stock market has had its share of yo-yos in the past as well, but the current phase seems to be prolonged like never before. A large number of stocks are expected to decline in value once the correction occurs. The economic downturn mirrors the fear and recession concerns due to business slowdowns (or shutdowns in many cases) and loss of jobs amidst the second wave of Covid-19. So much so that even regular investors with a penchant for equity and equity oriented securities and high-risk mutual fund portfolios are now changing their focus as well - from capital appreciation to capital protection.

Managing Finances

Experts say the resulting panic should not influence one's financial decisions. Instead, they advise portfolio reshuffling and diversification to meet future needs and goals. The pandemic has been a lesson in disguise for those who never counted investments beyond low-valued fixed income schemes. Buying life, health and term insurance policies has gained precedence over other financial plans and is imperative to minimise the impact of the current shock on investments and ensuring a financially secure future for our loved ones. The need of the hour, therefore, is to build a sanitised portfolio with the right asset allocation and choice of investment options.

Focus On Health Insurance

Since Covid-19 is caused due a viral infection, almost all health insurance plans cover hospitalisation expenses. The Corona Kavach Policy announced by the Insurance Regulatory and Development Authority of India includes hospitalisation coverage, pre- and post-hospitalisation, home care treatment expenses and AYUSH treatment. Those who already have a comprehensive health plan can avail of the pre- and post-hospitalisation costs, including in-patient and out-patient expenses. The new normal is to go for a higher cover instead of the normal Rs 5 lakh. Those with existing health plans may consider buying a top-up or super top-up health plan. There are standalone super top-up policies as well.

"Super top-ups are useful in case of multiple hospitalisations," says Rakesh Jain, Executive Director and CEO, Reliance General Insurance. "The deductible is applied not only on the first claim, but to the extent of deductible in the super top-up policy as well. While selecting a super top-up scheme, the deductible should be equal to your base health insurance plan. The super top-up kicks in once your base sum insured is exhausted. A top-up plan covers additional expenses, but is beneficial in case of single hospitalisation only."

For increased protection from the virus, you can buy a critical illness cover also. Most insurance companies classify chronic co-morbidities as critical illnesses. Says C.S. Sudheer, Founder and CEO, Indianmoney.com, "Critical illness cover provides insurance coverage for big health emergencies like cancer, heart diseases, organ transplants, etc., that require enormous financial support for the treatment procedure. This cover generally pays out a lump sum amount, even without hospital bills, thereby safeguarding one's family from the financial crunch arising out of a prolonged situation. However, so far, no insurance companies have included Covid-19 as a critical illness. So, taking a critical illness cover during a pandemic is a subjective matter."

Another cover that has gained prominence is term insurance. Term insurance is the 'go to' product that can help secure families' future. The idea behind paying for a term plan is to enable your loved ones manage necessary expenses and pay for liabilities in your absence.

But in all these, do keep one thing in mind. Do not visit a branch office. Choose from term policies sold on digital platforms. The term insurance amount must cover possible future expenses of your loved ones along with debts. The nominee must be explicitly mentioned for the insurer to hand over the proceeds in the absence of the policyholder.

Investing in MFs

Remember the famous adage "This too shall pass"? The current state of the market must not prompt you to exit investments. If you have invested in mutual funds through systematic investment plans (SIPs), check if their performance is still aligned to your long-term financial goals. Recurring investments in SIPs are deemed best to absorb market shocks and fetch returns in the long run. If you have the financial capability and necessary risk tolerance, a lump sum investment in MFs may allow you to tide over the market downturn by accumulating more units at deep discounts.

Says Suresh Sadagopan, Founder, Ladder7 Financial Advisories, "Lump sum investments can be done now in equity only if it is for the long term (five years plus). There can still be a lot of turbulence in the market due to the pandemic. Also, equity investments work well only in the long term."

The vacillating movement of the market has also brought forth a renewed outlook towards mutual funds. Do not judge MFs based on their performance alone, check for the quality of the portfolio of the schemes. "The top 10 holdings in a mutual fund scheme define the fund manager's outlook and associated portfolio risk. Compare schemes before and pick them according to your risk appetite and financial goals. Also, review your portfolio annually, especially after every hint of market correction, to keep it in sync with your financial objectives," says Raj Khosla, Founder and Managing Director, MyMoneyMantra.com.

Safety Is Key

Taking risks is necessary to earn returns. But, in the current situation, caution is the buzzword. Park money in debt instruments like fixed deposits or a public provident fund. You may also create an emergency fund by putting aside a lump sum in your savings account or creating a recurring deposit with a bank. Safe investment options, including small savings schemes, which ensure safety of capital and steady returns, are advisable despite low-interest rates. The price of gold and silver has also declined considerably, which gives you an opportunity to increase your investments in gold mutual funds or dematerialised instruments like Sovereign Gold Bonds. While the returns may not surpass your equity instruments, they will reduce the effect of market volatility on your investment portfolio. Says Dhirendra Kumar, Founder and CEO, Value Research, "Apart from the pleasure of wearing jewellery, gold bonds are the best way to hold the metal. All other forms of gold have either a physical risk or some cost. In contrast, gold bonds provide full gold returns (tax-free on maturity) as well as an extra 2.5 per cent."

Choosing ULIPs

Balancing risk and safety is not an easy task. Allocating some part to equity while putting the rest in comparatively safe instruments is not easy unless one has a sound knowledge of personal finance. If your financial goals are long-term, put your money in unit-linked insurance plans (ULIPs). "Investing in ULIPs helps you create a corpus over a period and can be customised according to the insured person's requirements," says Vivek Jain, Head, Investments, Policybazaar.com. "ULIPs are highly recommended for people in the 25-40 age group. Once settled, they can start investing a part of their income towards future goals." This is because ULIPs have multiple fund choices within a single plan, which helps you choose between funds as per requirement.

Discarding Expensive Debt

The pandemic has resulted in job losses. However, this does not translate into relief from interest on loans and credit card debts that continue to accrue if not paid. Try to clear off recurring debts quickly so that there is more liquidity to tackle emergencies. You may also opt for debt consolidation by seeking a personal loan at reasonable interest rate to pay off your high-interest credit card debt and loans all at once.

Says Adhil Shetty, CEO, BankBazaar.com, "It is wise to reduce your existing debt as much as possible, especially, in the light of the pandemic. However, do not close all your existing loans at the cost of your investments. Instead, adopt a systematic approach. Figure out the best way to close the most expensive ones - typically personal loans, credit card loans, or any unpaid revolving credit. These are the most expensive loans, and it makes fiscal sense to close these as early as possible. One of the ways to do this is by taking a secured personal loan against your assets such as fixed deposits or insurance or mutual funds. The secured loan has a much lower rate of interest. You may even want to dip into some of your investments with very low returns to repay the loans. This will also free up your credit limit."

While health is a cause for concern, the effect of Covid-19 can be felt on our finances too. However, it must not cause us to lose sight of both our short-term and long-term financial goals. Taking care of your finances is equally important. After all, it is easier to sail through any problem if you have enough money in hand.

(Abeer Ray is a Delhi-based journalist)