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Should you go for investment products that come with lock-in?

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  • Considering job losses and pay cuts in the wake of the covid-19 pandemic, financial advisers are of the view that an investor should take some special measures to cushion the impact and prepare for the worst.
  • Interest rate on most of the long lock-in period products such as Public Provident Fund, National Savings Certificates or Kissan Vikas Patra was sharply reduced recently and it may go down further.

Uncertain financial situation and the market dynamics coupled with a bleak economic scenario are prompting people to take a hard look at their investment options. Investors are especially concerned about products with long lock-in periods, say five, 10 or 15 years. Many are wondering whether it is the right time to lock funds for the long term. Read more to know what you should do if you are in a similar situation.

Enhance your liquidity position

Considering job losses and pay cuts in the wake of the covid-19 pandemic, financial advisers are of the view that an investor should take some special measures to cushion the impact and prepare for the worst. Financial impact of the pandemic is here to stay for a long time, and therefore, make sure you have enough emergency funds that can be easily accessed. “Given the current crisis, it makes sense to increase liquidity. Focus on higher emergency corpus and conservative allocation for goals in next two to three years. So if one does not have adequate liquidity, then committing for the long term does not make sense," said Rohit Shah, founder and CEO, Getting You Rich, a financial planning firm.

Purchasing power risk

Interest on most of the long lock-in period products such as Public Provident Fund, National Savings Certificates or Kissan Vikas Patra was sharply reduced recently. In most of the cases, these products are currently offering lowest returns since they were introduced. Many experts believe that interest rates on these products may go down further.

Moreover, since returns from most fixed income securities are taxable, the net return—what is received after paying taxes on the gains—may not be able to beat inflation. In such cases one loses purchasing power of funds over the period.

So at present one should first look at the emergency fund. Considering the current situation, one should have at least a year of expenses as an emergency fund. If you have adequate emergency funds, excess funds should be invested in line with your portfolio, risk appetite and goals.




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