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Business News/ Money / Calculators/  Debt, equity volatility reiterates importance of plan
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Debt, equity volatility reiterates importance of plan

A person on a financial planning road doesn't look at investment products in terms of returns

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With week after week of continued market volatility, it is imperative to soothe investors’ nerves by reiterating certain market rules. In their weekly show, Smart Money, Monika Halan, editor, Mint Money, and Vivek Law, editor, Bloomberg TV India, discuss what your strategy should be in these volatile times—whether to continue your systematic investment plans (SIPs) or exit before it’s too late.

Vivek: Monika, we have that sinking feeling again: huge volatility and sudden sharp cuts. Most people would be thinking whether or not to continue their SIPs and what to do.

Monika: Absolutely, Vivek. There are a number of people calling and asking what should they do. It is scary to see things collapse, especially when things were going so well a few years back. It’s a difficult time, but this is also the time to figure out what kind of investor you are. If you are the traditional investor who is going to stay safe with fixed deposits, real estate and gold, then you should just stay there and not venture out searching for higher returns. But if you are looking at non-traditional financial products, then you have a financial planning road ahead of you and there are certain rules that you have to follow to remain fairly safe. You have got your core portfolio, which is zero risk, in place and then you have a certain part of your money exposed to risk through equity. If you have taken that road then although it is scary, you know that you are still on the right track.

There are two things that you need to think about on this road. One, you don’t shop for higher returns all the time. In the beginning of the year, debt funds were all set to have a rally in the bond market and everybody wanted to invested in debt funds. I think Vivek, that time we said stay with your financial plan. We said that debt as an asset class needs to be a part of your money and that you should not redeem your equity and put it in debt funds just because there are expectations of a rate cut. Now, all those rate cut stories haven’t come true and debt funds have been hit badly.

A person on a financial planning road doesn’t look at the best investment product in terms of returns but stays with the plan and structured investments.

Two, it is important to understand what place each product has in your portfolio. For your everyday needs, there is savings deposit. For emergency and near liquid needs, you have fixed deposits and liquid funds. For near-term goals, there are fixed deposits and debt funds. For your long-term goals, you have your provident fund, Public Provident Fund and equity funds. Also, you have carefully chosen insurance policies to build medical, critical illness and life insurance covers. This is the financial planning way. If you step out of that, then at this moment you are going to be very scared. But if you stay within this paradigm, you will continue your SIPs because you don’t need this money next year, but much later. So, as long as you follow the rules, you would be safe.

Vivek: We have a caller now. Anil, what’s with your credit card spends? Get ready for a strong scolding from Monika.

Monika: Vivek, you have already warned him! But the idea Anil is not to scold you but to show you that there is a lot of pain ahead because I’m seeing a money box, which is not just empty, but is full of holes. Those holes will only grow larger and larger. Here’s what we are going to do.

The red flags for me are the five credit cards and a persistent problem with not being able to get out of your huge credit card debt. Your entire monthly income is going to pay off this debt. You have already taken a gold loan against your wife’s jewellery. There’s a home loan and a car loan and yet—I actually couldn’t believe it—you want to replace that car with a new one.

There are two things here. One, you really need more income. So either get yourself a higher paying job or your wife goes to work. You need extra money coming in—from your family assets or rent or whatever. Two, you need to reduce expenses. This is no rocket science, but you can’t spend more than you earn. You will have to cut down the lifestyle costs and save 10,000-15,000 a month. It could be selling off your car to save the instalments and the fuel cost and taking public transport to work. Such things only you can figure out, but you need to see that extra 10,000-15,000 a month so that you can start making chunky payments on your credit card. Start with the card that charges maximum interest.

For two years, you need to take drastic steps. There should be a no lifestyle expenses during this period: no eating out, no movies, no new gadgets and no new phones. You have to spend just on basic living and nothing else. Cut up your five credit cards and use only cash through your debit card. Take no card until you are able to handle them properly. Otherwise, the debt will go on ballooning and put your wonderfully supportive family under duress. So there is a drastic family meeting you require in the next one week to figure out how as a family you are going to deal with it and specifically you as a person, who is the main breadwinner. I am hoping that you come back on the show in six months to a year and tell us that your credit card debt is almost over.

Write to mintmoney@livemint.com OR sms at 9773270010. Type SM, give a space, and write your query.

Catch the show on Friday: 08:30pm, Saturday: 06:00pm, 08:30pm, Sunday: 10:00am, 12:30pm and 05:30pm on Bloomberg TV India.

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Published: 26 Aug 2013, 07:20 PM IST
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