Taking Crises as an Opportunity for Improvement and Learning

The last nine months have been a challenging time for all industries, especially for Financial Advisory companies. In March, when the markets went into a downward spiral and almost 40% of market capitalization vanished in a span of a few days, it was a massive shock for everyone.

It suddenly brought to fore the importance of disciplined Financial Planning which a lot of people tend to ignore.

The first and foremost being - having adequate Health Insurance cover. Confronted with high hospital bills, a lot of people suddenly realized that a 3-5 lakh health cover was quite inadequate and that at the very minimum, 10- 20 lakhs cover should be there for the family.

The second most important decision that everyone overlooked was having a good Term Insurance plan which would take care of their families in case something happened to them. This harsh truth had to be faced by a lot of families who lost their only bread earner to the pandemic. The reality that ULIPs and traditional insurance policies provide very inadequate cover was apparent.

With certain industries having to lay off staff, people suddenly realized the importance of having an Emergency Fund which would take care of their family’s expenses and EMI’s for at least six months till they look for another job.

Any family which had planned and had in place the above three steps was better placed to withstand the Pandemic times. Those who had not given heed to these, finally understood their importance and there was an upsurge of people opting for Health & Term insurance this year.

After these three steps came the Importance of Asset Allocation - in India, a country of savers, people mostly keep their money in bank FDs, buy insurance and/or gold and invest in PPF. Government and private data show very few from this large pool of savers actually invest, that is put their money into financial assets which give returns higher than the rate of inflation, thus creating wealth.

The approach to investing is mostly in bits and pieces, rather than in a well thought out manner where the total investible funds are distributed across several asset classes, called the Asset Allocation process. 

For most investors, it is advisable to have a simple multi-asset strategy where the funds are distributed among equities, debt and gold. Historical data shows that rarely has been the case when all of these three assets have risen or fallen together. When equities rallied, in most of those times bond and gold have either remained flat or slid. Then when bonds rallied, equities and gold did not perform well. In March, you saw that when equity markets crashed, gold price shot up!

During this Pandemic, a lot of families suddenly realized that they were stuck with illiquid investments (like real estate) or that they were over exposed to Equity. With markets crashing, they saw their net worth majorly eroded and had many sleepless nights.

But those who had their financial basics in order and had a proper Asset allocation in place were rebalancing their portfolios by investing in Equity when the markets were down. They are booking handsome profits today as the markets have suddenly shot up again in such a short time.

Hence, sometimes it takes a PANDEMIC to make one understand the importance of having a Financial Plan in place, staying the course and being disciplined in your Investing and not taking any knee jerk reactions.

If you still don’t have your basic financial plan in place, start today, better late than never!

As Winston Churchill said, never waste a good crisis.

About the Author

Mr. Shrey Mehta is the Associate Director of SMFS (Sanjay Mehta Financial Services). He is an alumnus of IIM Raipur and VIT, Vellore and a certified Associate Financial Planner.

In the past, he has worked with Wipro on multiple technology projects in the domain of cloud computing. With Dabur he worked on improving their distribution network. He handled media marketing at Hindustan Times. He has also worked with multiple start-ups, helping them with their financial and go-to-market strategies.

His background and professional experience deftly merge technology and business, placing him in prime position to tackle investing and financial planning.