Lessons from the CoVID 19 Lockdown

The CoVID19 pandemic and the consequent lockdown has brought in a humbling experience to many of us, including individuals and/or businesses thought to be foolproof of themselves given their indispensable nature of product or services. Barring food and dailies (groceries) none of the presumed basic services needed to mankind have become affected adversely. Alas, none has been spared. The neighborhood barber/salon or the cobbler who mends shoes right up to liquor barons (barring regulatory risk) and would have thought to be proof from any eventuality have faced different levels of threat during this pandemic. India’s service economy which is almost 2/3rd of the GDP has taken a massive hit. At the business and at individual levels, the lessons the current crisis has have been of very basic nature. On the principles of “risk management” most of the lessons that this crisis offers are rudimentary. A quick look at basic lessons from this crisis.
Cash is King
We need to write this title in large and bold font in our minds and actions. Cash if the blood of any business and a key element of an individual’s personal financial wellbeing. Without enough cash businesses freeze or worse, go bankrupt. Without cash, an individual’s household can face immense hardship and probably make or break the family and household. The current crisis has brought out this basic element of money management to the fore. Many businesses (large and small) and individuals all are strapped for cash during these times, however, people who had planned for crisis level reserve for cash would emerge out of this crisis stronger and would be able to grab opportunities crisis’ bring after they pass. So, what is the lesson from this crisis to us all? Keeping reserve or emergency cash/liquidity, always, is as basic as it should be. For a business, 3-4 months of cash burn should be available to tide over during such unforeseen times, and similarly for individuals, 4-6 months cash for expenses should always be kept at call. People who followed this golden rule will find it easier to tide over the current situation without much hassle.
Health is Wealth
This again is as basic as one can understand. Health is not acquired without effort. To remain healthy – physically and mentally, individuals must put effort into eating good food, resting enough, and working out physically. Similarly, for mental health, individuals require attainment of inner peace, sound conscience, and a positive attitude. All the above is easy to attain if the practice of working towards it is regular and not when the crisis is on the horizon. The second aspect of health is a risk. The first part was risk mitigation by doing many things as explained earlier, the second and the most important part is risk transfer. Despite all the care and work on your health, it could be possible that your health is compromised due to reasons beyond your control; risk transfer helps you to cover health failure without any financial damage. The best form of risk transfer is “health insurance”. And to plan for the same when there is time is again a basic thing to do. Individuals should be prepared to pay a small cost to cover himself/herself and family from any health eventuality. The health risk is real. Recognize and prepare for the same without delay.
Multi-tasking is underrated
The CoVID19 crisis has taught this one thing – one more time. Specialists are overrated and generalists are underrated. The crisis has been easy for generalists. Everyone who depended on a specialist for everything from household chores, outsourcings kitchen (and cooking), and technical staff and many more things, have been rendered faced with a big handicap. People who could easily mold and become a self-service oriented person are having a relatively easier life during this crisis. Multi-tasking on the home front or office front should be the way forward. Cooking, housekeeping, fixing the small things, doing office duties with minimal help and above all ability to learn quickly – technical as well as basic stuff is the key to ever remain relevant. The faster one learns this the better prepared he/she is for the current and future crisis.
Upskilling has no age bar
Why is it that suddenly everyone is rushing to get enrolled for the online course? That is because nobody knows what kind of skills the world would demand, in 2021. People are rushing to upskill/upgrade their knowledge for the fear of being left out once the world re-opens. While that might sound a good thing to do, upskilling and staying relevant is a continuous process. It does not start during the crisis and ends when the world is normal. Leaning a new skill does not have an age bar. To stay productive and relevant an individual must repeatedly upskill and upgrade continuously. This way, the person would be the sought-after individual when the normalcy returns. Corporate / businesses are looking at human talent that is ready and easy to plug/play during difficult times. Upskilling/upgrading requires time and an individual should set the same aside regularly and not just when crisis hits the horizon.

STOP – Should you use the EMI Holiday?

RBI Announcement for CoVID19; Impact for borrowers 

A 3-month moratorium for borrowers of all kinds.

  • Lending institutions are “permitted” to grant a moratorium on installments between March 1, 2020, and May 31, 2020.
  • All banks/lending institutions are covered in this scheme and all types are payments are covered – unsecured / Agri loans/retail/ working capital loans include credit cards.
  • This is ONLY a postponement of EMIs/Interest and NOT waiving of EMIs/interest. 
  • Interest would get accumulated for the period and added to the principal outstanding.  This means you need to pay additional interest during the course of the loan. There is no penal interest or adverse impact on credit rating/score.
  • You can check the applicability and procedures with your financial institution.

While the above decision from the RBI has been a welcome relief to people with temporary cash flow issues faced by many borrowers, this article helps you evaluate whether to avail of the moratorium. 

Who is it meant for?

This is meant primarily for individuals and businesses impacted by the economic fallouts from COVID-19.  The lending institution may need to be satisfied that the deferral is necessitated on account of the fallout from COVID-19.  This would be useful for affected businesses and salaried employees working in Aviation, Retail, F&B, Contracting, Travel/Leisure, and other high adverse impact sectors. However, it is not restricted to any sector.  One can opt for this measure if one would like to create a small buffer to tide over what might be a slightly long draw battle for these sectors to get back to normalcy. Those unaffected need not avail of this option since interest continues to be charged during the moratorium period. This will only extend the tenure of your loan.

Use early repayment if possible

A practical approach for you-

  1. Must Avoid: If your interest rate is very high (eg. Credit Card outstanding), one should avoid availing of the deferral of payment.
  2. Those whose salaries/business cash flows are impacted and are extremely stressed on their finances should avail of this benefit in toto. Take this break to put things in order, rack up some liquidity to tide over the current situation; and work out a plan on how you will service these loans from June 2020. The opportunity is God sent for this category and should be availed.
  3. Those who are tight on their finances and uncertain about their business recovery/ salary impact can also avail of this moratorium period. However, they can do two things
    • First, create a buffer of 2-3 months basis this savings in EMI paid out to help tide over the immediate liquidity situation. 
    • Payback part of the whole of deferred installments post the moratorium period, once favorable clarity emerges on the potential impact on one’s finances. 

Impact assessment for borrowers taking this moratorium over the medium term

If you have a current outstanding of Rs 50 lakh, with 10 years remaining on a home loan with an interest rate of 8.75% and you defer the full 3 months of your EMI, the following is the higher payment you would make on the full tenure of the loan based on when you pay back the deferred EMIs to the lending institution:

When repayment of deferred EMI is made Additional payment on loan(Rs) Closure of loan (months)
At end of the loan                                  263,456                                    123 
Repaid in full in 12 months (with interest) 14,169                                    120 
EMI repaid after 3 months 6,398                                    120 

 

In summary

  1. There would be additional interest on interest (since the amount of interest would be effectively added to your principal outstanding on the date of deferment). If you don’t make any prepayment during the tenure of the loan, the impact is significant.
  2. This would, therefore, mean that you should NOT utilize the total EMI holiday unless your cash flow position during the 3 months is stopped or disrupted.
  3. Do try and repay these installments at the earliest possible date to reduce the interest burden on your loan.
  4. Avoid deferring the payment of your credit card outstanding as the interest rates are high.

Further, Read FAQs on EMI Moratorium – Most questions answered

How much health insurance cover should I take?

Health Insurance


* The highest form of risk is a medical risk.
* The inflation is higher than normal.
* One needs to take cover post exit or retirement.
* If you don’t have a steady income, you need it most and a medical risk can eat into your savings.
* A major surgery cost about 10- 15 Lakhs as of today.
* Recommend
– 25 – 5 Lakhs cover.
– For 10 – 25 – 50 Lakhs, premium is marginal.
– Top Up Insurance.

Talk to our certified “Health Insurance planning advisors”.

Call us +91 98453 99780

We do encourage to use online technologies.
Follow us
Facebook : https://www.facebook.com/Righthorizon…

LinkedIn: https://www.linkedin.com/in/right-hor…

Twitter : https://twitter.com/Right_Horizons

Email : contactus@righthorizons.com

Whatsapp : +91 9148096684

ELSS Saves Tax And Makes You Rich

Heard this great saying by former US President Richard Nixon? “Make sure you pay your taxes; otherwise you can get in a lot of trouble.” Sampath a young 28 year old man, works in an IT firm in Bengaluru. He had never heard of Richard Nixon, but he knew he had to pay taxes.

Sampath earned Rs 12 Lakhs a year. This salary meant he paid a lot in taxes, as he never bothered to do tax planning. He grumbled, he cursed, but he paid his taxes.  All this changed the day a friend introduced him to mutual funds, or more specifically a type of mutual fund called Equity Linked Mutual Funds or ELSS. His friend also told him something he would remember all his life, “A rupee saved is a rupee earned.”

ELSS is an equity diversified mutual fund which invests most of your money in stocks across sectors. An investment in stocks is risky, but investing across sectors called diversification, offers a measure of protection. ELSS has a compulsory lock-in period of 3 years. This means you can’t touch the investment for this time.

Sampath had another problem. Where to invest? He had some money in fixed deposits. Fixed deposits offered decent interest, but you can never get rich, just by investing in FDs.

You must be having a lot of questions, the first one being, how does ELSS save tax? You enjoy the Section 80C deduction up to Rs 1.5 Lakhs a year. ELSS is the only mutual fund which enjoys this benefit. There’s a 10% long term capital gains tax (LTCG) on capital gains exceeding Rs 1 Lakh a year.

ELSS is an excellent investment if you fall in the higher tax brackets. Sampath earned Rs 12 Lakhs a year which put him in the 30% tax bracket.  ELSS saved Sampath Rs 46,800 a year.

Sampath invested Rs 1.5 Lakhs a year in ELSS. Now 30% of Rs 1,50,000 is Rs 45,000. Add a cess of 4% on income tax of Rs 45,000 which translates to Rs 1,800. Sampath saves Rs 46,800 a year by investing in ELSS.

He enjoys the highest returns among Section 80C options with the lowest lock-in. Sampath chooses the best way of investing in ELSS which is through SIPs.

ELSS invests most of the money in stocks. Doesn’t this make it a risky investment? Any investment involves risk. Even FDs are risky as a part of the interest you earn is swallowed by inflation. Equity investments offer high returns at high risk. The key is to stay invested for the long term and cut risk in investment.

ELSS is an excellent investment for a young man like Sampath. He doesn’t have many responsibilities and can stay invested for the long term. This makes ELSS an excellent investment for many youth in India.

Now to the second question. How does investing in ELSS make you rich? Ever heard of compounding returns? Compounding returns are return on return. The returns you get are reinvested to give more returns. Find this difficult to understand?

Let’s see how much Sampath has if he retires at 60, having invested just Rs 8,000 a month in ELSS via SIPs. Sampath has 32 years left till retirement. Let’s assume a conservative return of just 9%. Sampath would have built around Rs 1.77 Crores at retirement from this SIP. Looks a massive amount. Sadly, Sampath will have much less at retirement. Inflation eats up a lot of his returns and if you assume an average inflation of 5% over the period, Sampath will have only Rs 60 Lakhs at retirement.

Here’s the good news. ELSS can give average returns of 12-14% over 3 years and 15-17% over 5 years, depending on the type of ELSS. This is nearly double the returns most conservative investments offer. The longer you stay invested, greater are the returns. The power of compounding ensures you are a Crorepathi at retirement.

ELSS saves tax and makes you rich. You can save Rs 46,800 a year on being in the highest tax bracket. This amount when invested in the ELSS gives returns much above inflation. ELSS combines the double benefits of tax saving and compounding returns to make you rich at retirement.