It is advisable to not take new loans during a pandemic situation, as there is very less income security with possible salary cuts, job losses on account business slowdown.

Covid-19 has affected countries, global markets and individuals on varying levels. Many measures have been taken by regulators and governments in response to this crisis to ensure that their respective economies survive. With the weight of sustaining livelihood becoming more critical as compared to reducing the pace of COVID-19 spread, governments across the globe are now heading towards gradual unlocking of the economies.

In turbulent times like these, it needs no reiteration that investors should be very disciplined with their personal finance decisions. As Warren Buffet puts it, “we don’t have to be smarter than the rest but disciplined than the rest. You need a reasonable amount of intelligence but the temperament is 90% of it”.

Unprecedented situations like these can lead to hasty decision making, some of which might yield sub-optimal results, and hence investors should try to avoid the following mistakes:

1. Inadequate rainy day fund: The importance of having an emergency fund is critical during the current pandemic situation with a lot of uncertainties relating to businesses and job continuity. It is advisable to keep at least 3 to 6 months of your expenses as an emergency fund and putting those funds in highly liquid instruments such as liquid funds or fixed deposits. Having all your savings into financial instruments which have lock-in periods would be unwise going forward.

2. Taking your eye away from expenditure management: It would be prudent to postpone large expenditures that are discretionary in nature till such time that things become normal, in order to maintain adequate liquidity and savings. Avoid spending money on big ticket items during online sales from e-commerce companies until it is of utmost necessity.

3. Shifting your investments from beaten-down asset classes to those where prices are elevated: History has shown that the best returns are always made when investing in bear markets. However, investors have shown tendencies of pulling out money from these asset classes and shifting the same to less beaten or safe asset classes. Such behaviour leads to investors not participating in any upside once the dust settles. It’s imperative to adhere to your long term asset allocation.

4. Stopping your SIPs/investments: After witnessing a bear market in equities, investors usually get cold feet in deploying new money to beaten down strategies. Instead of timing the markets one should continue their investments based on existing financial plan.

5. Taking fresh debt/leverage: It is advisable to not take new loans during a pandemic situation, as there is very less income security with possible salary cuts, job losses on account business slowdown. Any default in the repayment of loans could negatively impact your credit score and future borrowing ability. On the contrary, you should try to repay your liabilities starting with higher interest loans such as credit card debts to reduce your financial burden.

6. Not reassessing your financial plan: Periods like these give opportunity to reassess risk tolerance appetite and rebalance the portfolio to the desired levels. Risk assessments done during sunny days have chances of being wrong mainly due to overestimating the risk appetite.

7. Not consulting your financial adviser: It is the right time to have your financial planning done from your financial advisor and sticking to the same. Any impulsive calls without such consultation could again be detrimental to financial health of your portfolio.

In summary, it would be prudent to draw up your own Investment Charter, which is a vision document that lays down the philosophy, framework and process of managing your portfolio, while also aiming to understand broadly, the purpose of investment, horizon, liquidity and risk appetite.

(By Ashish Shanker, Head of Investments, Motilal Oswal Private Wealth Management)