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Due to work-for-home and online classes for children, a family would need a bigger accommodation than they would have initially planned
Due to work-for-home and online classes for children, a family would need a bigger accommodation than they would have initially planned

Big shift needed in the way in which we manage money

Covid-19 isn’t going away soon. It is in our best interest to swiftly adjust to the new normal

The pandemic has changed the saving and investing landscape. Several time-tested tenets have found their way into the trash can, while many others have been given a complete makeover. In the light of these tectonic changes, investors need to re-assess their approach and apply new strategies towards money management.

Real estate: It has been a buyer’s market since the previous financial crisis of 2007, but covid-19 has created new opportunities for buyers. The lockdown has further depressed realty pricing. According to one estimate, there are 1.35 million residential units lying unsold even as cash-starved builders struggle to complete projects within the agreed deadlines.

At the same time, this might be the best time to buy a house or office space for self use. Desperate builders and stressed borrowers are trying to pamper buyers with freebies and benefits. Loan rates have also fallen below 7%, the lowest in decades. The income tax deductions on home loan lower the effective rate to below 5% for those in the highest 30% tax bracket.

While it makes sense to buy when the market is down, do reassess your needs afresh. Due to work-for-home and online classes for children, a family would need a bigger accommodation than they would have initially planned. Also, social distancing norms at workplaces translate into larger spaces than earlier envisioned.

Generally speaking, no matter how good the deal looks, stay away from speculative purchases and buy only for self-use.

Mutual funds: The stock markets have witnessed extreme volatility in the past few months. After a precipitous plunge in March, the indices bounced back and are now trading just short of the all-time high achieved in January. Though one can’t avoid the volatility in stocks, one can always minimize risk by rebalancing the portfolio to restore its original asset allocation. It is recommended to rebalance at least once a year, or after a major market development, where a particular asset class moves up or down by more than 15-20%.

Though rebalancing is beneficial, few investors do it. Earlier this year, when Sensex rose above 42,000, very few investors were booking profits. In March, the index fell 40%, very few thought of adding stocks. Imagine how rich you would be if you had sold in January and bought in March. If you are unable to take that call, go for dynamic asset allocation funds. These schemes base their equity exposure on market valuation. When valuations are costly, the equity exposure will be reduced, and vice-versa.

Health insurance: In the pre-covid-19 era, very few people took health insurance seriously; many were content with the group insurance cover from their employers. But the group cover won’t be available if one loses his job. Covid-19 hospitalization bills have shown us that a simple 2-3 lakh health cover won’t help. One needs a higher cover of at least 10-15 lakh for the entire family.

Life insurance: To safeguard the financial future of your family, you need to have a life cover of at least seven to eight times your annual income. Add to this any big-ticket borrowings such as home, education or car loans. This can add up to a big sum and a traditional insurance policy could be too costly. A term insurance is one way to secure your family’s future as it provides a substantial cover at a low cost, but doesn’t offer maturity benefits.

Banking: If you have costly loans like credit card outstandings, try to consolidate such debts under a lower-cost loan. Collaterized borrowings, such as loans against property, are cheaper than unsecured borrowings. With an eye on future creditworthiness, always maintain an impeccable credit rating and settle all your financial obligations on time.

Without hesitation, reach out to friends and family for financial assistance. You can also access liquidity by redeeming some investments. Consider divesting stocks, gold funds and fixed deposits. You could even make a partial withdrawal from the Public Provident Fund (PPF), where the interest rate has been cut to 7.1%. If the investment in PPF has completed more than six years, you can withdraw up to 50% of the balance at the end of the previous financial year. It is also possible to take loans against life insurance policies that have completed more than three years.

Essentially, tough times can entail unpleasant decision-making. My recommendation would be to restrict discretionary spends and to follow a disciplined and frugal approach. Nothing lasts forever, good times will be back sooner than we can today imagine.

Raj Khosla is managing director, MyMoneyMantra.com.

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