5 must-have protective measures for your money

TABLE OF CONTENTS

• Insurance - Protection from vagaries of life
• Guaranteed products - Protection from volatility
• Equity products - Protection from inflation
• Gold - Protection during financial crises
• Emergency fund - Protection from crises

There are so many contrasting ideas out there. One, for example, will tell you it's important to be aggressive and chase your dreams and wants. On the other hand, others will tell you it's important to avoid losses and maybe, even risk.

The truth is, there's no easy answer. It cannot be one over the other. It has to be a little bit of both.

The same applies to your money too. On one hand, you need to put your money in options that can make you more money. At the same time, you also need to ensure there are basic protective measures in place. Protective measures like these five below.

Think about it this way. You would be able to step out and go to work freely only after locking your house and safeguarding it, right?

So here we are. Read on.

01 Insurance - Protection from vagaries of life

You go to any financial advisor, and the first question they'll ask you is if you have insurance. Ok, it may be the second question, (the first being if you have a bank account), but you get the point, right?

But not any insurance. The most basic and simplest of all protections—term and health insurance. One protects you from medical bills, the other protects your family in case of any unfortunate event.

Both are fairly simple. The premium payments are relatively lower and affordable. Yet, many make two key mistakes with something as simple as insurance.

1. They rely only on employer-provided insurance. This is a problem because employers typically provide very low coverage. For example, an employer is likely to provide a health cover of Rs 2-3 lakh. Experts, meanwhile, recommend a cover of at least Rs 5 lakh for an individual, more in case of higher risk to illnesses. So, often the first act through the financial journey is to get adequate insurance coverage. (You can check out how much term plan you need with this calculator.)
2. They expect returns. It's natural to want some kind of a return when you pay for a certain product. It's what we are used to expecting. Pure protection plans, like term and health insurance, may not show you these returns during happy times. So people often look at these two products as a pure expense. In reality, though, these type of insurance plans can be the cheapest way to protect your and your loved ones' lives.

02 Guaranteed products - Protection from volatility

If insurance is the first layer of protection, then products that earn guaranteed returns are the next layer. This includes fixed-income or 'Debt' options like Fixed Deposits or even your Guaranteed plans provided by insurance companies.

The idea is simple—get a fixed amount of return for the money you invested in it. But it's important to keep in mind 3 key points when investing in such options.

1. Don't invest all your money in such options. This will reduce your ability to earn returns that can fulfil your dreams and wants in life. Because they are safe, they are also likely to not have the ability to generate high returns
2. Look at the taxability. Even if the return is higher than the inflation—the rate at which prices rise, taxation of the returns could potentially reduce the returns further. For example, let's say an investment promises a return of 10%—the same as inflation. This means, for every Rs 1,000 you invest, you'll get another Rs 100 as return. However, if this money is considered as taxable income and you fall in the 30% bracket, then your net return is just Rs 70 (Rs 100 minus 30%, i.e., Rs 30). This reduces your net return to 7%.
3. Timing and liquidity are crucial. The most common component of these options is that the money is locked in or fixed for a certain period of time. It could be 3 years, 5 years or even 15 years. During this time, that money is quietly locked away, earning returns for you—it will NOT come handy during crises and emergencies. This is why it is important to really think through how long you are likely to invest for. Also important is to look at how you can sell or redeem from these investment options, in case of an emergency.

03 Equity products - Protection from inflation

Now that your house is safe and locked, you can peacefully go to work and earn money.

This is where equity comes in the picture. No, it's not gambling, like many believe. It really isn't.

Let's say your friend started a company and you gave him/her Rs 1 lakh—35% of the initial investment. Now, wouldn't this mean that you have a say in the company's matters? And more importantly, a 35% share in the company's profits?

Equity investing is exactly that—you buy a stake in companies and earn the benefits over time. As the company grows, so does that value of your stake in it.

This is why it's important to research diligently and understand which company you are investing in and why. Following tips blindly is where the mistake lies.

Alternatively, you can pass on the task of doing due research to expert fund managers whose sole job it is to invest money on your behalf. That too is possible.

Either way, the idea is to ensure you have some money in options that get you fixed returns, and some money invested in options that can get you higher returns.

How much should you split it? That depends on your age, your ability to take risks and the amount of disposable income you have. We'll explore this in-depth in a later newsletter.

04 Gold - Protection during financial crises

Experts suggest that you should have 5-10% of your money invested in gold. This is because gold is a tangible investment that can always come handy during crises. In fact, gold prices typically rise when the stock markets fall.

The mistake that people often make is investing too much in gold, or investing in a type of gold that attracts extra charges. For example, jewellery makers charge you extra as 'making charges'. This increases your cost and reduces your return.

05 Emergency fund - Protection from crises

This should ideally come at the very top. In fact, it can be clubbed with insurance. After all, insurance mainly comes handy during emergencies, right?

But there is more to an emergency fund that just insurance. It's about having liquid cash and money.

This is because, in life, there will always be days when you face sudden expenses. That trip to the dentist for a root canal treatment worth Rs 15,000, for example. Or a bad puncture that needs you to replace all your car tyres for Rs 25,000.

At such times, you have to shell out money. Why take it out from your regular expenses and bank account, when you can set aside a small sum for it? Ideally, it should be enough to cover expenses for 3 to 6 months. But you can build it slowly. We can go through this in detail on a later date, if you want.

The purpose of this content is to provide information about industry trends and news of general interest of our customers, potential customers and other professionals. While every attempt is made to ensure the accuracy of the information provided, we do not guarantee the accuracy of the information. ABSLI recommend that these general views should be cross-verified and reaffirmed before being used for personal financial planning purpose. The recipients of this material should rely on their own investigations. The past performance is not necessarily an indicative of the future performance.

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