As the year 2020 dawns, like every new year, there are plenty of opportunities for financial progress for your family. This is even in the backdrop of an unprecedented economic slowdown as reflected by lower estimates of GDP growth in India in 2020 that ranges from 6.1% by International Monetary Fund (IMF) to 4.9% by international rating agency, Moody’s. While various pay hike forecasts like the recent one by international consulting organisation, Korn Ferry, predict a healthy pay hike of 9.2% for 2020, in a year of slower economic growth, pay hikes for many may not be great. That is why regular savings and smart investments are critical in a year like 2020. Equally important is financial security which includes life insurance as well as insurance for auto, health, home, accidents and critical illnesses. Here, we provide you with a brief money management primer for 2020.
Savings In 2020
In the backdrop of a sluggish economic growth, you need to ensure that you save enough and save regularly so that you have enough savings for major future needs like child’s higher education and retirement. That’s not to forget nearer term needs such as a vacation or a big-ticket financial gadget. So, what should be your approach towards savings in 2020? Here are some suggestions. Save before spending: If what you save is what remains after meeting regular, essential and non-essential expenses, 2020 is the right time to make a new beginning. Next year, stash away the required savings for your various future needs every month and then start using the remaining part of your pay. This might mean reducing, delaying or staggering some expenses. But how do you find out the amount of money you need to save regularly? You can find out the amount needed for a particular financial goal like child’s higher education and then determine the regular savings and investment required. So, if you need Rs 25 lakh for your child’s higher education in 15 years. You need to save and regularly invest Rs 7,225 every month, if your money were to grow at 8% every year. You can similarly find out the other amounts you need to regularly save to have ample savings for other needs. This also includes financial protection with payment of insurance premiums.
Regularly invest through RDs and SIPs: For those who find saving money difficult, they could use automatic routes such as systematic investment plans (SIP) of mutual funds and recurring deposits (RD) of banks and post office, where the money is invested automatically from your savings account. You can invest small amounts like Rs 500-1,000 and more, regularly through these ways.
Lock into high FD rates: For lump sum amounts required for needs likely to arise in the next 1-3 years, consider fixed deposits (FDs). While doing so, remember that in 2019, five interest rate cuts were affected by the Reserve Bank of India (RBI) that put downward pressure on interest rates in the economy. In 2020, given the expected tepid economic growth, you can expect some more rate cuts. This would mean that it will be important for you to lock into the highest possible interest rate for bank FDs of 1-3 years tenure, be it is new investments or re-investments.
You also need to be very careful about approaching FDs from companies and non-banking finance companies (NBFCs), as many of them continue to be under financial stress, a taste of which we got in 2019 with some high profile NBFC mishaps. The self-employed who will face disruptions in income flows in 2020 can opt for RDs. They can use them to make annual investment contributions and meet obligations like annual insurance premiums. Since FD interest is taxable, those in the highest tax slab will need to compare the tax impact with alternatives like debt mutual funds.
Prepay loans, convert EMIs to regular investments: For those with outstanding loans, 2020 may well be the year of prepaying outstanding loans, especially high cost loans like auto and personal loans besides credit card debt. Of course, for loan prepayments, you need lump sums like bonus, commissions, maturing investments like FDs or sale of consistently underperforming investments. After prepaying your loans, ensure that you continue setting aside money equal to previous EMIs to take advantage of an established habit of putting money away.
Enhance savings with tax savings: If you are to make your money grow well with ample savings in 2020, your tax savings efforts will have an important role to play. This means you maximising your annual tax deductions of up to Rs 1.5 lakh under Section 80C, Rs 25,000 under Section 80D and for home loan interest repayment of up to Rs 2 lakh under Section 24 for self-occupied homes, for the financial year of 2019-20.
Next, before making tax saving investments for the new financial year of 2020-21, claim tax deductions for eligible expense items under Section 80C such as home loan principal repayment, tuition fees and provident fund deductions. Thereafter, meet your existing commitments for tax saving investments such as life insurance plans.
It is only after you have covered these two areas, invest the amount required to exhaust the limit of Rs 1.5 lakh. Do the same for deduction for health insurance premiums under Section 80D even as you claim tax deduction for home loan interest repayment for your self-occupied home under Section 24. The remaining amount of your regular savings can be directed in towards fresh investments for long-term and short-term needs. This sequence of steps will help grow your savings outside of the tax saving investment universe while claiming the tax benefits.
Financial Protection in 2020
Ensure adequate life insurance protection: Your family needs adequate financial protection at all times and 2020 will be no different. Review your life insurance coverage and consider one of the newer term life insurance plans to plug any gaps. They provide you with the option to increase the life insurance coverage regularly besides providing life insurance at affordable premiums.
Widen safety net: Threats to your family finances also emanate from accident, critical illness and other risks and can cause a substantial financial setback for your family. If there are gaps in protection against such risks, 2020 could just be the year to make your family more secure than ever. This can be done with a two-pronged approach.
First, attach relevant riders with any new term plan you buy. This will give you a low-cost insurance coverage that pays out a pre-decided lump sum during emergencies. Second, buy standalone insurance plans from general insurance companies be it health, accident or critical illness plans. Since, health costs grow faster than general inflation, insurance for health emergencies, especially costly treatment of critical illnesses, is vital. Here, an important thing to remember is that you should buy various insurance plans despite employers providing any insurance coverage. This is because the protection from employer plans end with your employment in an organisation.
Consider ULIPs for growth: While many experts feel that one shouldn’t combine life insurance protection and investments, however, many people find it convenient. This is especially so for unit linked insurance plans (ULIPs). They provide life insurance cover and let a part of the premiums buy units of funds that invest in varying mix of debt and equity investments. Investors can opt for a ULIP fund according to their risk appetite. Since, ULIPs help individual investors invest in equities, they stand a chance of getting highly rewarding in the long term i.e. 8-10 years or more, like most equity-oriented investments. The major criticism of ULIPs related to their high costs and charges have been addressed significantly over the years by the insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI). What’s more, the various riders can also be attached to ULIPs. Thus, in 2020, if you are comfortable with the idea of having a combo of life insurance and investment, you could consider buying an ULIP.
While the Indian stockmarkets went through substantial turbulence in 2019, it still grew by about 14%, an impressive achievement. Despite an economic growth that’s expected to be tepid compared to the past, existing investors of equity mutual funds, that invest money in equities, need to stay invested to gain from the typical long term growth. Stick to mutual funds SIPs: Staying invested for the long term is critical for investors who make regular investments through SIPs, where in tepid markets, you buy more units with the same amount of regular investments. Over the long term, this helps the cost of the buying units, go down. Consequently, you immensely gain from the value appreciation of units over time.
Consider tax saving ELSS: Get high growth for your tax saving investments by earmarking new tax saving investments to equity linked savings scheme (ELSS) for future needs like child’s higher education. You can do this both in the remaining part of the current financial year and in the new financial year commencing from April 2020. In fact, SIP in ELSS will help you systematically make tax saving investments. You can follow the same approach for tax saving mutual fund retirement plans.
Avoid high risk equity funds: This may not be the best year to take up higher risk funds such sector- or theme-oriented funds. Instead, to ensure that you at least get the growth of equity markets, consider investing in funds based on broad indices such as NSE 50. This includes index funds and exchange traded funds (ETF).
Use debt funds for shorter term needs: For needs expected to arise in the next 3-4 years, consider debt mutual funds. They invest in debt securities and these funds should benefit from declining interest rates. For needs 3-5 years away, consider hybrid funds which invest both in debt and equity investments. Last but not the least, instead of letting your money vegetate in bank savings account or in the form of cash, consider parking the money in shorter term debt funds such as liquid funds.
You can look forward to a house-warming party in 2020, if you have a stable income and are expecting pay hikes in the next few years. With interest rates expected to decline some more in 2020, this could be a great year for getting great home loan bargains. With lots of unsold and ready-to-move in homes available in major cities, getting home bargains may not be to difficult too. According to real estate consulting firm Anarock, some of the most attractive options are in areas like Dombivli and Panvel in Mumbai area, New Gurgaon and Sohna in NCR, Hinjewadi and Mahalunge in Pune, Sarajpur Road and Electronic City in Bengaluru and Kondapur in Hyderabad. Needless to say, be very careful about new projects and check up on the track record of the builder and the project. Find out whether you will have recourse to Real Estate Regulatory Authority (RERA). You will need to be equally careful about buying homes in the resale market too, especially anything that appears to be a distress sale, even as you keep a hawk eye on investments in commercial real estate.
Thanks to geopolitical tensions such as the US-China trade spat besides tensions in the Middle East that could impact oil supplies, gold as an investment has performed really well with many investors investing in it to find solace and security. During 2019, the yellow metal provided return of about 20% in India. Since gold is denominated in dollars and imported, the depreciation of the rupee has also helped boost returns.
In 2020, we can expect help global tensions such as US-China trade skirmishes, any crisis in the Middle East, which supplies most of global oil, and other developments such as Britain’s imminent exit from Europe, to boost gold prices. Any significant movement in the value of the rupee will also play an important role.
For individual investors, the approach to gold would be no different from that in the past years. They need to restrict their gold investments to not more than 5-10% of the value of total investments. This is because gold typically lags behind equity and real estate in terms of returns in the long-term. Instead of buying physical gold in the form of biscuits and bars and bear the cost of safe storage in a locker, consider investing in gold ETFs or paperless gold, to benefit from its growth. For years, the year 2020 was used to symbolise the future. Now that future is here. The good news is that it is coming to us with immense possibilities and promise. Could we have asked for more?