As we can’t pin all our hopes on a windfall or a lottery ticket, it is obvious that we need to save regularly to meet life goals. Sometimes, however, we may need to temporarily stop some or all of our monthly investments. Let’s call this an ‘investment recess’. So when you should take an investment recess?

Investment recess is a temporary period — not more than a year — when you stop contributing by way of systematic investments from your current income to some or all of your investment accounts earmarked for achieving your life goals.

Below are some situations when you may have to hit the pause button.. The first instance is when you have used up some or all the money in your emergency fund, because you faced a medical emergency. Your emergency fund needs quick replenishment because you may need to tap into it at short notice.

If you have used it up, you may have to dip into your current savings to refill the account. As you cannot cut your current consumption, you will have to put off fresh investments — that is, take an investment recess.

Whether you want to stop all or only some of your systematic investments will depend on how much top-up money is required to refill your fund.

Try not to stop systematic investments that are meant to achieve life goals with a time horizon of five years or less; a shortfall in such cases may be difficult to bridge.

Some scenarios A second reason to initiate an investment recess is when you face a fall in your income. This could be due to loss of employment or a pay cut. During such periods, your primary focus should be to meet your consumption needs and service your home loan and other obligations.

Third, you could choose to take a break from investing when you have just achieved a life goal. Let’s suppose you were setting aside ₹40,000 a month in an account for the past six years to make the down payment for a house. Suppose you made the down payment and just bought a house in February.

After accounting for the new home loan instalment, if you are in a position to spare ₹10,000 towards a new life goal or top-up an existing investment you can take a two-three month investment recess. The money that you do not invest temporarily can be used towards discretionary spending to celebrate!

To ensure that you do not continue to spend this amount, set up a systematic investment plan starting a few months hence. That is set up an SIP for ₹10,000 in March that will take automatic effect from, say, June.

Bridging the gap An important side-effect of an investment recess (arising from the first and second arguments above) is that you could fall short of accumulating the required wealth to achieve a life goal.

The problem will be sorted out if you experience higher-than-normal return after the investment recess period. Or, you are able to increase your capital contribution later to make good the shortfall. But you cannot always bank on these two factors. So, it is important to protect your portfolio from further losses during an investment recess. Towards this end, ensure that you cash out profits, if the gains on your equities are already more than the annual returns needed to achieve the life goal.

To reduce emotional stress during investment recess, fresh investments during this period, if any, should primarily be in stable-income products such as bank fixed deposits. Do remember to align these investments to your life goals.

The writer is the founder of Navera Consulting. Feedback may be sent to portfolioideas@thehindu.co.in

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