Letter to Investors - July, 2020

From: Mohit Kheskani

Date: 5th July 2020

Dear Fellow Investors,

As always, I hope all is good at your end & you are enjoying the onset of monsoon! Interestingly, I would talk about Rainy Day Funds (an idiom for emergency funds) in today’s letter.

Let me first start with giving you some insights on what has transpired in the financial markets & the economy in the last one month.

• The Benchmark Index (Nifty 50) has rallied 7% since June 2020, lead by huge investments Foreign Institutional Investors (FII), Domestic Institutional Investors (DII) & of course the general public who did not want to miss the bus! Retail Investors largely have been giving in to their FOMO (Fear of missing out) feeling in the current rally.

• The underlying economy and the stock market paint a different picture for itself. Even though we are unlocking the economy, with due precautions, the cases of coronavirus are rising and the health of many businesses are worsening. The reality is that no-one knows what the actual impact of this economic crisis will be and how soon will it unfold itself.

• There is a broad range of figures shared by the leading economists of the country for de-growth of Gross Domestic Product (GDP), ranging from -15% to -45%. It is not certain what side of range we will be in, but we know that there will be de-growth for sure.

• And after announcing a host of measures, the government is running out of options to fund the fiscal deficit. Hence, we have been at the receiving end and shelling out 80 bucks for a litre of petrol (for the first time in history, diesel has become more expensive than petrol).

We maintain a cautious stance looking at the current situation and are confident that the recovery will happen sooner than expected. However, in the interim, there will be a lot of pain for some businesses & are confident that it should not affect any of our investments in an irreparable way.

In such a scenario, investing via SIP route is the best possible solution and the correct asset allocation (a very important concept, I will take this up in upcoming letter) will be the key to generating the extra returns!

All the above information drives home the point of building and maintaining a Rainy-Day Fund (and hope that it never rains) in the current uncertain environment that is surrounding us.

What are Rainy-Day Funds?

It is a reserved amount of money that can be used in times when regular income is disrupted or decreased in order to maintain the living expenses.

Also known as emergency fund, these can be used in case of any emergency or unforeseen circumstances like being laid off or changing of job or not having consistent income due to any reason.

How much is enough?

As much as possible! However, it is advisable to have a fund which can take care of your 6-12 months’ worth of expenses. This would translate to having 6-12 months’ worth of your income in the emergency fund.

When should we use it?

These funds come handy when you have some unforeseen expenses. I am mentioning a few common ones below –

· Taking a flight back home in case of an emergency

· A medical emergency

· I hate saying this but, when you are suddenly laid off from your job or when business is dull

These Rainy-Day funds will come in handy and ensure that you don’t have to compromise on your living expenses and have ample time to find a new job or work on a new business (as you already have 12 months’ worth of expenses in this fund)

How do we get to saving 6-12 months’ worth of our expenses?

Yes, this may seem very absurd in the first glance. To save 12 months of your salary might sound almost impossible. But you do not have to have to fund this on day one. You just have to start! And the fund will be built over time.

I would suggest start by saving 10% of your salary and see if you can increase this gradually over a period of time.

Where should we hold/invest these funds?

There are different ways to hold these funds. I will share the most common ones and we can have a detailed one to one discussion later on which suits you as an individual.

1. Our good old savings account but there is a twist. Due to ease of accessibility, we are more likely to use these funds in our day to day living expenses, hence, we would advise setting up a new savings account or hold it in your secondary bank account which you would not use often. This will ensure that you are not using these funds in the normal course of business

2. Fixed Deposits / Recurring Deposits. These are again age-old ways of saving the money but do ensure that these are flexible and can be withdrawn whenever required (without any pre-mature withdrawal charges)

3. Liquid / Ultra Short Duration Mutual Funds. This is by far the best way to hold your emergency funds as they give the flexibility to get your funds almost immediately & earn a decent return over other options discussed above. These funds need to be carefully chosen & regularly monitored (don’t worry, that is why you have chosen us as your advisor!)

When do we start?

The best time to start was 10 years ago, the second-best time is now! Better late than never.

To summarise, Rainy Day Fund is your best friend in hard times. They love it when you visit them in times of your hardship. If you have been loyal to them, they will not disappoint you in your hard times.

In the current uncertain environment that we are placed in, we should be well prepared to take care of ourselves and our near and dear ones! This is the way to do it and this is the time to start (if you haven’t already started!)

Do reach out if you need any more information or if you need to know something that is holding you back to start!

More power to you! Until Next Time!

Mohit Kheskani