Before you start your much-awaited investment journey I need you to go through this article and if you have already started off, then it becomes even more important to understand how you have to first build the shield that will protect your Investments in rough times.
By protecting your investments I meant about constructing the BASE. If you are going to construct a huge multi-storeyed building, first you have to create the foundation, so strong that it can protect the whole structure from unexpected & unknown circumstances.
No matter how good the construction is, if the base isn't supportive to that structure it would eventually fall! Just like the construction of a huge building you are going to construct the wealth, so you better build its base first & start from the roots.
The foundation of a good investment is the contingency fund.
Allow me to answer you how. And most importantly why?
Excited to kick start your journey, you started investing directly into the equity market (as most of us do and so did I), you bought some stocks, and along with that you also started a SIP in some equity-linked mutual fund scheme.
Well, you did so because you heard or self-realized that how important it is to invest and thought what's the harm in saving for the future! Moreover, you heard from some relative or friend of yours who is an agent to invest in certain funds & buy certain stocks. So you agreed, after all, it was going to benefit you only. You started your journey and even markets performed well for a few weeks and the value of your investments gone up (beginner's luck).
But a few months later, unfortunately, there's some situation where you are in need of some money. You need cash, urgently! Your bank balance is not sufficient to fund that emergency! So what you would do now? The answer is simple that you would withdraw your investments without any second thoughts. Well, that's not a thing to be worried about.
The problem here is that what if at that particular time markets are down and you have left with no choice but to book the losses and withdraw the money?
It's a possibility that can't be avoided. Because you don't really know, in-fact nobody knows how the market will perform in a short term period.
But your agent (if any) never told you about creating a contingency fund. Because it would delay the commission which they will earn from you or there are chances that they themselves don't really know the importance of Emergency Fund.
What exactly happens?
Let's go back to what happened exactly.
You were stuck in an emergency, a cash crunch when made you withdraw your investments.
What could be that situation?
Well, It could be anything.
Job/business loss, medical emergency, family emergency, third party liability, or whatever you cannot even imagine sometimes. (Who would have thought in their wildest dreams that they would be sitting at their homes for 90 days straight with no income support at all!)
How to avoid this?
The question arises here is can you avoid this?
Yes, totally. Just follow a thumb rule. Accumulate 3 to 6 times your monthly income as an emergency fund. You can keep such fund in your bank account, as an FD, or even in a liquid mutual fund scheme. So that you can liquify it on an urgent basis without worrying about withdrawing your investments & facing losses.
(That's just a generalized rule. For more accuracy consult with a financial planner or advisor.)
That is it from my side for today, See you in the next blog. Till then,
Liked what you read?
Share this blog on Whatsapp.
Subscribe to our Weekly Newsletter - FinMail
FinMail simplifies Financial Stories and topics for you. It is your perfect brew for your brain.