BUSINESS

Do your systematic investments need a pause?

If your income has declined this year as a fallout of COVID-19, you may be under pressure to manage your cash flows. In this article, we discuss why you should consider taking an Investment Recess to reduce the pressure on your cash flows.

Investment Recess is a temporary period — typically one year — where you stop your systematic investments earmarked for achieving your life goals.

Suppose you have been saving Rs. 20,000 every month till your income was affected because of the COVID-19-related lockdown.

You have to either cut your current consumption to continue saving Rs. 20,000 or reduce your savings to maintain your current consumption.

As humans, we suffer from present bias. We prefer instant gratification to deriving greater happiness in the future. So, consuming now is much better than saving today to spend in the future! But you have to save to achieve your life goals such as buying a house or funding child’s college education.

So, what should you do? It is difficult to cut non-discretionary expenses. This refers to essential expenses needed to run your household such as groceries and utility bills.

Also, you may want to spend some money on discretionary expenses (take-away dining, for instance) to reduce your emotional stress. That leaves you with little choice but to cut your monthly savings, leading to an Investment Recess.

You should take an Investment Recess on all systematic investments in equity mutual funds. This is required to ensure that your investments do not add to your already-high cash-flow volatility arising from unstable income.

For the same reason, you should also liquidate your existing equity investments.

RD no exception

You should, if required, also take an Investment Recess on recurring deposit (RD) earmarked for achieving any life goal, except your high-priority goal. A high-priority goal is one that you cannot postpone — your child’s college education fund, for instance.

Note that banks may charge a penalty if you fail to deposit money into your RD on the agreed date every month. An alternative will be to continue with your RD and use fixed deposits (FDs) to ease the pressure on your cash flows. The flip side is that lump sum money in your FDs will provide more emotional comfort than continually building your investments through RD. The choice between taking an Investment Recess on RD and breaking a FD should depend on associated penalties.

You should also work with your bank to explore the possibility of converting the money accumulated in your RD into a FD at a lower interest rate to reduce penalty charges.

These are unprecedented times. And such situations may force you to work against your best judgment, especially because pressure on cash flows is salient. One way to lower your emotional stress arising from cash flow pressure is to transfer some of your existing FD to your savings account.

Having normal balance in the savings account is one way to cheat your brain into thinking your cash flow levels are comfortable. Of course, moving money from an FD to a savings account will reduce interest income. Also, taking an Investment Recess will hurt life goals. But you are justified in being present-biased when your cash flows are under pressure.

So, your roadmap to reducing your cash flow pressure is as follows: First, take an Investment Recess on all equity investments. Second, liquidate all your existing equity investments and place the sale proceeds in monthly-income bank deposits. The periodic interest income can reduce the cashflow gap arising from a salary cut. Third, take an Investment Recess on RDs or break your existing FDs depending on the penalties. As the last resort, use fixed assets as collateral to borrow money.

(The author offers training programmes for individuals to manage their personal investments)

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