be prepared for the worst
If you are in a business or risky investment, assume that at some point you may suffer a financial loss. Here’s how you can prepare yourself for such an event:
Diversify: Don’t put all your eggs in one basket. Always invest 20-30% of your holdings in various financial instruments such as gold, debt and equities, so that your personal life and family do not suffer in case of huge losses. This is especially true for market-linked investments in the current scenario, when the markets are at all-time highs, says Mumbai-based financial planner Pankaj Malde. Dinesh Rohira, founder and CEO of 5nance.com, agrees: “Never mix business capital with personal wealth. By using the latter to capitalize on the former, you run the risk of affecting your family and financial goals. ”
emergency fund: This is a basic requirement for any home, especially if you are self-employed or making risky investments. Rohira says, “You must have an emergency fund to survive for at least six months. “If not, make sure you have other investments and assets that can be liquidated if needed,” he says.
health insurance: You should also have adequate medical cover of Rs 5-10 lakh because if you or any of your family member falls ill, when you suffer huge financial loss, at least your medical bills will be taken care of. Insure your loans: If you have taken a large loan, such as a home loan, make sure they are covered, so that if you suffer huge financial losses and are unable to continue with the EMIs, at least the loan is repaid Can go
take stock of the situation
Instead of a knee-jerk reaction, you’ll need to consider the cause of the damage and take adequate steps to restore yourself.
Don’t worry: First of all, don’t make a bad situation worse by panicking and making impulsive decisions, whether in loss trading or investing. If you don’t consider the big picture and take into account the reason for the decline, then redeeming your fund units or selling stocks the moment the market goes down could hurt your long-term gains.
Damage Cause: In order to proceed, it is important to evaluate the causes of the damage. “For example, in a business, you need to know whether it is external factors that are to blame or it is your own flawed strategy and inability to follow through. business plan, says Rohira. If the reasons are gross or external and beyond your control, there is little you can do about it.
If this is your faulty strategy, especially in an investment, go to a financial planner. For example, if the market is as high as it is currently, and if you keep postponing profit booking, you may incur a loss if the market drops suddenly. However, if it is a correction in the market and you have invested in mutual funds with a long-term goal, then you should not worry and continue investing.
Strategize and move forward: If your business has been running poorly for a long time and no external factors are responsible for it, then you will either have to take the help of a business expert or quit the business to get a job or try your hand at something else. If, on the other hand, external factors are to blame, such as the pandemic, then you need to weigh your options, especially if you are paying rent and employees’ salaries. If you want to stay in that order, you can take a break and upgrade your skills, or perhaps monetize your hobby and start fresh with another profession.
Compensation for loss for deduction of tax
There is a small silver lining if you suffer capital losses in a business or investment. You can set these off against capital gains and reduce your tax liability. However, losses can only be set off against a specific type of capital gain depending on whether it is short-term or long-term. So, if you have redeemed money from an equity fund in less than a year and incurred a loss, you can set it against the long-term gains in the fund in the next financial year. If you haven’t made any profit in that financial year but have filed your tax return by the due date, you can carry forward your loss based on the type of loss. For example, in case of loss from house property, you can carry it forward for eight years, but only four years in case of loss in speculative business.