Opinion | What you need to do now if you are worried about managing your finance3 min read . Updated: 11 May 2020, 10:48 PM IST
Run a reality check on your expenses and ensure your portfolio is diversified
What a roller coaster the last few months have been. From making plans for the summer vacation, individuals are now worried about job and salary cuts and the uncertainty the future may bring. To add to it, equity returns have fallen, leading to the overall portfolio being down.
The government has announced various measures like the moratorium on equated monthly instalments (EMIs) and credit cards and with no emergency cash in place, individuals are taking up the moratorium or the advance against the Employees’ Provident Fund (EPF) or both. Little do they realize that low-hanging fruit may be easy to access but actually doesn’t let you get to the sweetest fruit, which is financial independence.
Over the last few weeks, I have received many queries from concerned investors. Here are the common ones with recommendations on the actions you need to take.
A common query from millennials and Gen X is about having losses in their equity investments. If your investments are a couple of years old, then you should remember that equity is meant to be held for the long term, which is at least seven years. If you have not linked a goal to this investment, then you should do so now. This way you have a better idea of how long you can hold on to these investments. Those with unsecured loans like insta or personal or credit card loans must work on a repayment plan urgently, given the heightened job insecurity. The key is to keep cash burn minimal and have maximum savings.
Couples with small children are worried about not having enough liquidity to repay their loans. However, the moratorium is too expensive and the EPF advance would mean losing out on huge compounded returns in the future. Hence, the better option would be to look at various investments held and see if some other holdings like gold or even unit-linked insurance plans or Ulips ( which anyway give low returns) can be exited. This is a good time to take a reality check on expenses. I recently met a person who is spending 50% of his salary on his child’s primary education in a fancy international school. Add to that home loan EMI, there is very little left for investing.
Also, check if you have a diversified portfolio. Mostly, portfolios are either totally skewed towards equity or towards traditional investments like fixed deposits and investment-linked insurance policies, thus leading to low or volatile returns.
For people with teenage children, the burning issue is higher education expenses and retirement planning. You will need to assess your financial situation and may need to re-size goals. A friend who runs a business is not sure if she will be able to fund her son’s education in the US. In such cases, the family may need to consider pushing out the education goal to post-graduation studies abroad instead of undergraduate studies abroad. The education goal cannot be at the cost of the parent’s retirement goal. Period.
I also find some crazy investment recommendations for HNIs doing the rounds. These include category III alternate investment funds and debentures linked to real estate trusts. Given all the uncertainty and even otherwise, it is not advisable to lock into such instruments as the post-tax and post-expense returns in these products do not outperform even multi-cap funds in a big way. The ability to access funds or liquidity is a preferred parameter for any investment these days. If you hold a market-linked debenture and if the issuer is extending the structure by a couple of years, this is a sign of trouble and you would be better off asking them to redeem currently, provided the option exists.
For those investors who are retiring in the next five to 10 years, your sole focus needs to be on growing your retirement corpus and moving it into safer instruments once you are close to retirement. A session participant had a large portfolio in funds (chosen based on near-term returns) and with returns down by 30% and retirement coming up in the next six months, he was distraught and stressed about how to get monthly income post retirement.
With interest rates falling and traditional forms of income like rent not growing, the retired are finding it difficult to manage. I am hearing of cases of rent not being paid by tenants and the retired having to sell other investments to manage.
All these instances only show how important it is to plan finances in such a way that you are not dependent on the monthly cash alone but have different sources of income. This is what a financial plan needs to address, not just goals.
Mrin Agarwal is a financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra