A recession is one of the worst times to
live through. Economic slowdown results in unemployment, lowered demand, and a
lack of investment opportunities. This, in turn, causes psychological distress
by adding a direct strain on one’s finances. Fortunately, there are ways to
safeguard oneself from the disastrous consequences of a recession. Here are
some tips for how you can protect yourself in case the economy goes south.
Avoid Discontinuing SIPs
Your SIP is a systematic medium to long-term investment plan in mutual
funds of your choice. When markets grow weak and the net asset value of your
mutual funds decreases, this can put most investors in a state of unrest. On
one side, you are experiencing an economic downturn, on the other side, your
investment is turning into an added financial strain. However, during this
time, most SIPs
fetch investors more units. Once the market recovers, a few years down the
line, the units will have accumulated into a huge corpus. Hence, financial
experts recommend to not let go of your SIPs because of an economic downturn.
Source: The Economic Times
Your investment time horizon should be long
(5+ years), for your SIPs
to actually amass gains without being affected by the recession. If you are
only investing in a SIP
for 2–3 years during an ongoing recession, you should expert modest returns at
best. In case you are nearing your target investment goal and the recession
just hit, its best to transfer your corpus into liquid funds. This prevents it
from being impacted by market movements and serves as easily accessible backup
funds for surviving the recession.
Create A Nest Egg
This is a no brainer, however, its
significance must be emphasized. A ‘nest egg’ is money you are saving to put to
use for some unanticipated event in the future. In other words, this is your
emergency fund. Your investment plans might be a source of income, but they are
not liquid. If you are let off during an economic downturn, you will run short
of liquid cash. This can be prevented with the help of saving a sizable amount
in advance in fixed deposits, savings accounts, short-term debt funds, and
other saving-oriented financial tools.
This amount can be used for any financial
emergencies like medical bills, and instant loan repayments, or regular
expenses like utility bills and groceries. Ideally, your emergency fund should
be large enough to fund the costs you and your family incur for 6 to 12 months
as recessions can last this long before the clouds begin to part. You can
pre-calculate your personal/family’s monthly costs for a year to estimate the
exact amount you should be saving as a backup fund.
Diversify Investments with Gold
To cushion oneself from the dip in equity
markets during a recession, experts recommend keeping 10–15% of your investment
portfolio as gold. During times of uncertainty, this is a common practice among
investors as gold is a hedge against inflation and economic slowdowns.
Currently, with India’s economic growth lagging and the rampant coronavirus,
the prices of gold have surged. Physical gold itself might not be the best bet.
Instead, consider gold
funds.
When you purchase physical gold as bricks or
jewelry, there are added charges, such as GST and making charges. There are also issues with
keeping it safe, liquid, and pure over time. Gold Funds, on the other hand, are mutual funds
that invest in various forms of gold. This investment can be in the form of
physical gold or stocks of gold mining companies. Gold Funds that invest in physical gold offer
investors the convenience of buying pure gold at a lower cost to physical gold.
Besides, there is no possibility of theft and investor has the ease of selling
these units at the market linked price at the click of a button.
Get a Health Cover
The stress of saving every last rupee during
a recession is already high. It can become worse if you or a close family
member becomes unexpectedly ill or has an accident. The worst-case scenario is
that you will not have the requisite funds to pay for their medical costs.
Securing funds in health
insurance can insulate you during an economic crisis. In case the
policyholder incurs a medical emergency during this time, your insurance
company will cover all the medical costs of the policyholder and you need not
worry about securing the funds.
Individual health insurance plans
might serve you better than group health plans. This is because if you lose
your job during a recession, depending on your group health insurance policy, you may or may
not be able to receive medical cover.
In conclusion, consider diversifying your portfolio with gold funds, protecting you and your family with health insurance, building an emergency fund, and keeping long-term SIPs running during a recession to protect your wealth.
20 April 2020
5 mins read
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