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Opinion | This or that? Hard financial choices we must make
Use the hard lessons during this time to write a script for your future money life
The choices that the ongoing covid-19 pandemic is forcing us to make are not the ones we had ever thought we would need to make. Some countries in the West debated the human life value of the old versus the young and then decided to take the aged off ventilators to make way for those with a longer life runway ahead of them. India, luckily so far, has not been at that crossroad.
But there are a number of economic choices that we have been forced to make as incomes, jobs and livelihoods have been under stress. Last week, Adhil Shetty, CEO of Bankbazaar.com, spoke to me on the three toughest money choices during the covid-19 crisis during a live interview. Each question had two parts and as we moved from question one to three, the choices got harder and harder. These are questions that all of us need to face and then try and answer even if our backs are not yet against the wall. As I keep saying, we are far from done with this crisis, and it is best that we belt up for a rough ride for a while.
Tough choice question one A: Should I continue with my debt mutual fund or move to a bank fixed deposit? You need to evaluate if you fully understand the debt fund you bought. If you have matched your holding period to the average maturity of the bond, if you understand that your fund’s credit risk matches your own risk appetite, if you understand the tax advantage of being in debt funds and are not there just for the highest return, then you should continue. But if you bought debt funds because they were being sold as a safe way to get high returns, and do not have the capacity to take risk, move to FDs in a large scheduled commercial bank.
Tough choice question one B: Should I move out of my equity mutual funds to a safer option? Investors move from product to product without understanding that they need a portfolio approach rather than an “and/or” binary choice. Equity funds, if bought with an investing runway of at least five to seven years, are great products to hold for long-term value creation, but if you were looking to harvest quick returns in a couple of years, you are in the wrong product. You should never move out of equity funds, you should just vary the proportion. Hold less if your goal is near. Hold less if you are nearing retirement. But even at 80 years of age, your portfolio should have some equity in it. So, no, don’t move out.
Tough choice question two A: I have ₹1 lakh—do I continue with my SIP or pay my EMI? Pay your EMI, pause the SIPs so that once things get better you can restart them. If you are thinking of harvesting the extra return from a currently bullish market and doing the arbitrage between loan rates and equity returns, you will burn your fingers really badly. Don’t speculate, specially not at this time when your own choices are shrinking.
Tough choice question two B: I don’t have money for my EMI, should I take the moratorium? It is best to pay your debt if you can find the money. I would look at liquidating some of my assets to pay off the debts. Any FDs, debt funds, gold and PF stores can be used, not just to pay the EMI but also to retire as much debt as you can. The moratorium is not freedom from debt, you will pay a higher price once the EMI cycle beings again. Pay the EMI, liquidate some assets. I would keep equity at the end of the line for liquidation—that is the last pot I’d draw from.
Tough choice question three A: Should I pay my insurance premium or EMI? I would differentiate between good and bad insurance. A term life insurance and a basic medical insurance are two products you must find the money to fund. The rest, bundled insurance like traditional and Ulip, can be put on hold. Talk to the companies and they may offer a pause facility. Better still, relook at why you bought these and exit if you find they add nothing to your cover or portfolio return. I would take the moratorium and continue paying for term life and health covers.
Tough choice question three B: Moratorium is over, now insurance premium or EMI? Now your back is fully against the wall. This is the time to liquidate your assets, borrow from parents or other family and raid your PF account to pay for the life and medical covers. If you bought a term life at 35 and you let it go at age 45, you will let go of a locked-in low premium for the rest of your life. If you are tapping your PF, then promise yourself that once things are better, you will pay it back to the fund.
Of course, these are choices you face only if you have pared down your discretionary spends to the bare minimum. Don’t continue with your lifestyle costs and then think about raiding your PF for your loans or premiums. And use the hard lessons during this time to write a script for your money life.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation
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First Published:7 Jul 2020, 10:36 PM IST
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