Is it okay to break your equity investments in case of an emergency expense | Motilal Oswal

Is it okay to break your equity investments in case of an emergency expense

No matter how much of an effort you make, some things in life cannot be anticipated or foreseen. Some emergencies, like a medical issue or a job loss, can take a toll on your finances. You may be faced with sudden bills that are quite steep. To pay off these dues, you may have to tap into your savings or sell some of your investments. For instance, if you have an online SIP investment, you may have to stop the investment plan or disinvest in order to get hold of some liquid cash.

However, is it okay to break your equity investments in case of an emergency expense? The short answer is no.

Why should you not break your equity investments to pay for an emergency?

When you start an SIP online, you can invest small amounts each month regularly in the market-linked instrument of your choice. If you are using your online SIP investments to increase the equity exposure in your portfolio, you need to ensure that you remain invested over the long term.

Here is why.

1. You can tide over market volatility

The equity market can be significantly volatile, since the prices of stocks depend on a number of factors that are both specific and generic. If you buy and sell over the short term, the price volatility may affect your returns. But over the long term, you can tide over market volatility and ride over the highs and lows of the market without worrying about drastic price changes.

2. Equity tends to give better returns over the long term

Equity, as an asset class, tends to give better returns over the long term than the short term. For instance, over the 10 years prior to November 2021, the Nifty 50 Index has given a return of 13.5 percent (CAGR) and the Nifty Next 50 index has delivered a return of 16 percent (CAGR).[1] These double-digit returns could be the secret to beating inflation. 

3. You don’t need to time the market

When you invest over the long term by starting an SIP online, you need not worry about timing the market. You can continue to remain invested in the market without having to guess when to enter or exit your position. When you continue to invest small sums in a disciplined manner over the long term, you get the benefit of better returns and eliminate the need to time the market.

4. You may earn more dividends over time

By keeping your equity investments intact over the long term, you can continue to earn dividends on your stocks if the company pays out a portion of its profits to shareholders. You can even construct a portfolio of dividend paying stocks to earn regular income from your investments over the long term.

Other ways to manage financial emergencies

If it’s not advisable to break your equity investments to take care of financial emergencies, what can you do in case of an unexpected contingency or a sudden bill? Well, there are other smart ways to manage your finances and ensure that you are prepared for emergencies. Here is what you can do.

1. Build an emergency fund

An emergency fund is a corpus that is liquid, easily accessible and enough to get you through any unforeseen financial contingency. Experts recommend that your emergency corpus should be at least six times your monthly income. As your income increases, make sure that your emergency fund keeps pace with your rising salary, and increase the corpus accordingly. 

For instance, if you are earning Rs. 50,000 per month, you can start by building an emergency fund of Rs 3 lakhs. This should be enough to get you through a few months of job loss or help you pay for an emergency home repair. But if your income rises to Rs. 80,000 a few years later, ensure that you correspondingly grow your emergency fund to Rs. 4.8 lakhs. 

2. Get yourself insured

Insurance is a financial product that is exclusively designed for financial emergencies. Your financial portfolio should include different kinds of insurance to take care of different types of financial contingencies. Here is a closer look at the top types of insurance plans you should have.

  • Life insurance:

Life insurance plans give you a life cover that essentially insures your life for a specific period. In case of your demise during the policy term, your nominee will receive the sum assured under the plan as the payout from your insurer. This keeps your loved ones financially secure in your absence.

  • Health insurance:

A health insurance plan covers the cost of hospitalisation, surgery, pre and post hospitalisation expenses and ambulance charges, among other things. This kind of insurance keeps your investments intact in case there is a medical emergency.

  • Home insurance:

An unexpected home repair due to an earthquake or an accident can lead to a huge bill. But with home insurance, you can ensure that you don’t have to pay for this out of your own pocket.

  • Motor insurance: 

If you own a car and/or a bike, a motor insurance plan is a must because it covers any sudden repairs or damages that your vehicle may undergo. 

3. Use credit carefully 

Lastly, in case of an emergency, you may need to borrow money or use a credit card, particularly if your emergency fund is not large enough or if you have no insurance. In such cases, ensure that you repay your debt promptly, and don’t overuse your credit.

Conclusion

All in all, it is never a good idea to break your equity investments, especially when there are other ways to handle financial emergencies. And if you haven’t begun investing in equity yet, open a demat account with Motilal and start investing right away.

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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