Hard decisions in tough times

For those who don’t have adequate investments, taking a bridge loan to service EMIS may work

For those who don’t have adequate investments, taking a bridge loan to service EMIS may work , writes BINDISHA SARANG

Imagine the chaos: Global stock markets have gone into a tailspin, industries are shutting down, and countries are announcing lockdowns due to COVID-19. In less than a month, Indians find themselves in the middle of a global storm that has disrupted the lives of every citizen. Some sectors, such as aviation, are already cutting salaries and we will know about the magnitude of job losses only at a later date. During such times, money management and supplies become the core focus of all families. But what works for one person may not work for another. A few money management tips for four categories of people:

With an emergency fund and adequate

investments: You will survive this financially. For someone with three-six months’ emergency funds in place, well invested and without much loans, this is time to be calm. Nishant Agarwal, Managing Partner and Head – Family Office, ASK Wealth Advisors says: “Things will be relatively more comfortable for such people. Despite the historic fall in the stock market, this investor should not worry too much. Even the temptation to change from one fund to another can be kept on hold until things become clearer.” There are chances that there could be another bout of correction if the news flow worsens. But then, things may improve for the better as well. No action is the best action in current times.

If you are someone who has not invested enough in equities and are sitting on cash right now, this is the time to invest. Adds Agarwal: “Thank your luck that an opportunity like this has come. You can start by buying into largecap equities through index/exchange-traded funds/mutual funds or portfolio management services. You can invest anywhere between 5 per cent – 8 per cent of this cash. And build up to full allocation slowly and steadily.” Even if you have money in equities, you can still increase the exposure over the next three months. Nitin Rao, CEO, Incred Wealth Management, says: “We prefer actively-managed funds, portfolio management services and high-quality stocks for equity allocation.

Conservative investors can look at index funds or index ETF. Even debt investors can invest in AAA rated corporate bond funds to maximise their debt returns. An asset allocation review is also recommended.”

No emergency funds, with investments:

An emergency fund is perhaps the most critical thing today. But how should you create that? The options are: Switch from equities or equity mutual funds to liquid finds or redeem bank deposits. Raghvendra Nath, Managing Director, Ladderup Wealth Management, says: “Since these people do not have emergency funds and equities are languishing, you should not sell them.” If you have some money in fixed deposits and other debt funds, try and utilise them to create an emergency fund. Even gold would be a good idea since it is going up. You could borrow against physical gold or sell if you have it in exchange-traded fund format. And of course, if you have idle money lying in accounts, it would be a good time to consolidate bank accounts. M Barve, founder MB Wealth

Solutions, says: “Due to job-hopping, many people have several bank accounts, and sometimes, there is idle cash lying around in these accounts as well. You would be surprised to know that if you tap into these accounts of both spouses, you might even get enough to cover a couple of months’ expenses.” However, these accounts need to be active and not dormant. To revive a dormant account, you will have to visit the branch.

Freelancers: Unlike those with a job, if you are a freelancer or a consultant, things are going to be hard for you. With work expected to dry up in the gig economy, you need to get into action ASAP. Tarun Birani, Founder and CEO TBNG Capital Advisors says: “Such clients should maintain high cash levels. Currently, we are asking them to maintain six months of expenses due to uncertainty. If need be, they can move out of investments in a hierarchy of low risk to high risk.” Birani says: “Ideally, a loan should be avoided completely. In the worst-case scenario, you will need to do a cost-benefit analysis wherein you have equity investment, but no cash in hand. In a scenario like this, taking a bridge shortterm overdraft or loan may work instead of selling equities.”

There’s also an urgent need to cut all unnecessary expenses for at least a few months even after the lockdown is over and things get normal. Adds Rao says: “For freelancers, the work cycle should follow the economic cycle.”

Have investments and EMIS: If you have investments and home loan or other equated monthly instalments (EMIS), it could be tough, especially if your salary is delayed/cut or there is a job loss. Nath says: “It is a difficult period. Liquidate your investments partially and prepay the loans to reduce the EMI burden. But if one can sustain the EMIS, then one should continue with the loans and investments together. In the next two years, the probability of your investment returns beating the home loan rate of interest is very high.” There’s another option too. Rao says: “Seek an EMI holiday for a couple of months or take an overdraft against fixed deposits or securities which could be used temporarily.”

In short, it’s time to learn a few hard lessons for those who have not been careful with their money. But it’s never too late to start learning.