The year 2020 changed the way we worked, earned, spent and invested. Now that life is slowly getting back to normal, it is time to put the past behind us and look forward to new beginnings.
Here are a few steps to help you manage your finances in a better manner in 2021:
Don’t shy away from equities: The benchmark indices have hit their all-time highs and many analysts believe that the market is ripe for a correction. This does not mean that you sell off your equity funds and get out of stocks completely. Instead, make sure that your allocation to equities is not above the desired level. It is recommended that one should rebalance the portfolio to reduce the risk. In the current situation when markets are rallying, rebalancing would mean selling off some equity holdings and reinvesting the proceeds in debt.
Build an emergency fund: Job losses and pay cuts due to the pandemic-induced lockdown underlined the need for an emergency fund. This should be your first priority because emergencies don’t come with a warning. Keep aside money equal to 3-4 months living expenses in a safe and liquid option where it can be accessed at short notice. Don’t be lured into putting this money in a high yield option. Earning high returns should not be the core objective of this fund.
Review your insurance cover: An emergency fund takes care of living expenses but will not be sufficient to cover for hospitalisation. For medical emergencies, you must have a health insurance for yourself and your family. The Covid experience shows that a cover of Rs 2-3 lakh will not be sufficient. Go for at least Rs 5 lakh, alongwith an additional top-up cover of Rs 3-5 lakh.
Rejig your retirement planning: The budget has proposed a tax on the interest earned on Provident Fund contributions exceeding Rs 2.5 lakh. If you are among those who contribute large sums to the Provident Fund through the VPF channel, it is time to change your strategy. Restrict your Provident Fund contribution to Rs 2.5 lakh and then invest in the Public Provident Fund (PPF) where your money will earn higher tax-free returns. If you have any further surplus after exhausting the Rs 1.5 lakh PPF limit, only then consider increasing VPF contributions.
No need to spread bank FDs: The budget has also raised the deposit insurance limit to Rs 5 lakh. Consequently, investors need not spread their deposits across several banks. Invest up to Rs 5 lakh in each bank to keep your money safe under the deposit insurance cover.
Invest in gold to hedge portfolio: Analysts expect consumer inflation to be higher than the projections for 2021. Gold acts as a hedge against inflation so it is a good idea to invest part of the portfolio in the yellow metal. Sovereign gold bonds are a good way of investing in gold because the pricing is linked to gold prices, and there is an additional interest payment. A word of caution : don’t invest too much in gold. Experts say gold allocation should not exceed 5-10% of the portfolio.
Conclusion: The IMF confirms my belief that the worst is indeed behind us. The time is right for us to now seize the initiative and to strive energetically towards our goals.
(The writer is Managing Director, MyMoneyMantra.com)
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