We like to deal with money as a block and are loath to break it up into smaller bits that will do different things. The same pot of money can do a variety of things if put in different products, but we would rather take a neat decision of swinging the whole pot at one problem. Splitting up the money would make more rational economic sense, but we end up not doing that. But luckily financial planning is about the human being at the centre of the problem and cold logic need not always win. And that is what happened last week. Sitting with a friend and working out if he should repay the home loan or invest the money in something, again brought me face to face with this problem. He had enough money to pay off the loan but was attracted to the rising market and wondered if he should invest it instead. His key worry was the servicing of the equated monthly instalment (EMI) in the months that his consulting income was not enough. He heard me out as I drew diagrams to explain how periods of high inflation work to the advantage of the borrower and how he, with his steady practice, an existing pool of paid-for real estate assets and fairly large (though irregular) inflows could more than sustain the loan. But when I asked him to create a pool with six months worth of EMIs to de-risk this income variation and invest the rest, he hesitated. He wanted to get rid of the whole amount and did not want to break it up.
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So we worked around the problem and agreed on prepaying the entire loan at one shot, taking a hit on the prepayment fee and then converting the current EMI into a systematic investment plan (SIP). Not the most efficient way, I went ahead with it because that’s what made him comfortable—and financial planning is a lot to do with personal choices and how we want our money to work for us.
A similar situation, though a different problem, came last week on the show that I anchor. A caller wanted to secure his family by increasing his existing life cover against the two home loans he had taken. He had asked the insurance company to bump up cover on the same policy, but the company had refused and he was stuck. Just breaking up the problem into smaller bits solved the issue. The two home loans with differing maturity periods would need two policies equal to the amount of each loan. As the loan is either prepaid or paid off over time, the policies can be discontinued. If the income rises to merit further cover, he has the option of continuing one policy and closing the other. A term life is an annual contract and you can cancel at anytime.
Endnote: Money is fungible. This is one of the first financial planning lessons learnt early in the life of anybody in the advisory space. Fungibility is the ability of some stuff to be exactly the same, and being that, be substitutable as another unit of the same stuff. A Rs 100 note is exactly the same as another one (though, I must admit, I prefer notes that don’t have Ram Lal scrawled across one side, nor the ones that are so new that they give paper cuts on fingers, but then if the shopkeeper handing over the note looks strangely at me, I quietly accept). Other stuff that can exactly exchange itself for another fellow stuff is a barrel of oil, or a kilo of wheat of the same type or a gold bar with the same markings. Stuff not fungible is jewellery or a house or art.
While currency is fungible, art, wine and other exotic investments are not. And seeing the green shoots of sales pitches and advice recommending these products makes me think that we are near a top of the real estate and stock market. All the money that could have been absorbed has been and for those still looking for an investment outlet, the exotics make a comeback. Art. Antique furniture. Wine. Single malts. When is the last time you took your family antique gold to sell because the gold prices were high? Or when did you take that painting off the wall to book a profit? It does not happen—not for the average person like us who is not an art dealer or a connoisseur of these products but is a regular bank fixed deposit, SIP and some insurance policy fellow. Who has an average day that will have some part of the machine breaking down, a jumped red light that costs a challan, a dog that is still throwing up at home, a leaking tap that just refuses to get fixed. Art, wine, antiques are better enjoyed by the senses and will make more money for the person selling it to you than for you. You’ll see these increasingly pitched in the coming months. Real estate is possibly the only non-fungible asset that should be a part of your portfolio. Avoid the rest.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at email@example.com