From Director’s Desk | Anirudh Dar
Up till the middle of March 2020, none of us took COVID seriously. Then came a strict three-week nationwide lockdown. Corporates began to feel the heat and cut salaries from anywhere between 10-50%. Hundreds of thousands of people lost jobs or were sent on furloughs. This was a disruption in our lives like never seen before.
It would be fair to assume that the average person suffered immensely due to changes in their work situation as well as in their domestic finances. But the question is, did everyone suffer equally, or were some people truly able to manage this most unlikely and hostile climate better than others.
When I founded Plutus in 2014, it was set it up to be a financial planning company first and then an investment advisory company because I truly believed that no matter how much wealth one has, the future is always uncertain and for that uncertainty, we need to plan well so that when an exigency like this crosses our paths, we may be bruised by its severity, but will bounce back faster than those around us would do.
In the last five months, several clients have stopped their SIPs simply because their discretionary cash flow didn’t support additional investments. The second reason for stopping SIP’s and redeeming funds at huge losses was attributed to a lack of financial discipline. The first and fundamental principal of financial planning is provisioning for an emergency cash flow. Financial planning teaches us to plan for the ‘certainty of uncertainty’. This planning requires individuals or families to provision for between 6-9 months of their living expenses – built up over a period.
Imagine a family who spends about 2 lac per month on all their fixed (or living) expenses. If this family is saving any money at the end of each month, a portion of that free cash flow must be put aside in absolute liquid avenues like bank savings accounts, fixed deposits or even liquid mutual funds – and they must continue to put this money aside until they have been able to save for the expenses for 6-9 months for themselves.
Data from the EPFO has suggested that Indians have withdrawn more than Rs, 30,000 Crore from their PF accounts just to tide over this COVID period and have essentially ended up taking a large chunk out of their retirement savings to fund daily living expenses. For a country that has a savings rate of almost 30%, a statistic like this begs the question – where India is getting its financial advice from and why are these very people not being taught a savings discipline that requires them to save for unforeseen emergencies.
COVID may soon become a distant reality from our lives, but this will not be the last time we are faced with such uncertainties and should that happen, I hope you will be better prepared to handle that crisis.