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Begin The Year With A Clean Slate

Take stock of investments, prioritise loan repayment and look around for the best options for a solid financial future, says Aniruddha Bose

For most of us, the new year kicks off with fresh determinations and resolutions — and getting our finances in order often tops the list. And yet, anecdotal evidence suggests that most of our year-end financial situations continue to be just as chaotic as the year before! And as the year progresses, we tend to relapse into our old patterns — overspending and overleveraging, buying stocks on tips, locking ourselves into opaque and confusing insurance plans, and using ineffectual evaluation tools to purchase a plethora of mutual funds, to name just a few. If you are serious about improving your fiscal fitness in 2018, start off by taking these simple but constructive actions in the first 15 days of the year.

Insurance
Have you opened an e-insurance account yet? If not, it is the first thing you should be doing this year. Opening an e-insurance account is costless, and you can choose from one of the four authorised repositories, namely: Central Insurance Repository, Karvy Insurance Repository, CAMS Repository Services, and NSDL.

Even if you are not purchasing a fresh policy right now, you should digitise your previously held policies by opening an e-insurance account and submitting the required documents. The four repositories offer their forms, along with documentation instructions, on their individual websites.

Once you have organised yourself with an e-insurance account, you will have a bird’s eye view of all the policies you hold as on date. This is the point when your catharsis needs to begin. Chances are that like most people, you have harboured a poor understanding of insurance as a risk-transfer tool until now, and this may have resulted in the fruitless accumulation of several traditional plans or costly ULIPs.

Start by nixing your traditional or ‘non-linked’ insurance plans, either by surrendering them or making them paid up. All you need to do is look up the centralised helpline number of the insurer, express your intent and request the next steps. Next, move on to your ULIPs, and do your homework about the annual costs you could be incurring. If they exceed 2 per cent per annum excluding the mortality charges, either exit them — or stop paying further premiums and wait until the stipulated five-year period is complete before redeeming them.

Apply the simple thumb rule of 20 times your annual income plus outstanding liabilities to arrive at your adequate term insurance cover requirement, and take up a simple term plan with a leading insurer with a high claim settlement ratio. Make sure that you have got a robust health insurance plan in place for yourself and your family — aim for a coverage of at least Rs 2.5 lakh per person for a policy that floats between your family members.

And the end of the clean-up process, you’d want to be left with no traditional plans, very few ULIPs, adequate term coverage, and a rock-solid Mediclaim policy.

Mutual Funds
If you have been investing into mutual funds for some time now, there is a good chance that you have piled on too many schemes for your own comfort.

Counterintuitively, there is very little good that can come from holding more than five equity-oriented mutual funds and five debt mutual funds regardless of your portfolio size; and with this rule of thumb, you should commence the process of cleaning up your portfolio in the first 15 days of 2018.

Instead of applying a bottom-up process of deciding which funds in your current portfolio to hold and which ones to unload, do the reverse. Seek the advice of a trusted advisor on the best five equity-oriented funds and the best five debt-oriented funds from the universe of available funds, that are best aligned with your unique objectives, financial goals, and risk profile. Get yourself on board a paperless transaction platform such as BSE’s StAR MF or NSE’s NMF II to save yourself from the mountains of documentation that a portfolio clean-up may entail.

Keeping loads and taxes in mind, formulate a plan to liquidate the mutual funds that fall outside your thoughtfully chosen set of schemes, and proceed with the implementation as soon as possible.

To prevent the same problem from recurring, restrict future portfolio inflows through SIP’s to the same set of funds.

Stocks
It is a fact that most stock portfolios that are self-managed by relatively uninformed retail investors tend to grossly underperform even broad indices, leave alone actively managed portfolios that are backed by solid research and active management by experts.

Retail investors are notorious for holding on to losers for too long in the false hope of a recovery, while dumping potential long-term winners at the slightest inkling of a chance to book profits. Resultantly, we find that very few retail portfolios tend to comprise of quality stocks in the long run, and a lot of them harbour so called ‘lemons’.

If you have built an equity portfolio that is fairly large in size, it is strongly recommended to consider transferring your stocks to a PMS (portfolio management service) provider with a long-term track record of outperformance, unless you’ve got the wherewithal and bandwidth to actually research and study the fundamentals of the companies you’re holding. Leading PMS service providers such as Motilal Oswal, Aditya Birla Sun Life, ICICI Prudential & ASK Investment Managers are worth considering.

If you prefer to go down the DIY route, it is best to restrict your holdings to up to 10 quality stocks, while fighting the sunk-cost bias which may be holding you back from unloading long-term losers from your portfolio. Keep your self-managed portfolio trim and avoid making speculative trades on tips this year.

Loans
No clean-up process is complete without having a concrete plan of action to manage your outstanding debts. Excessive consumerism, coupled with the easy availability of small financing on credit cards, has exacerbated the problem of overleveraging for many of us. You probably already know that the cascading effect of paying too many EMIs can seriously impair your ability to achieve your financial goals, not to mention elevate your levels of financial stress to uncomfortable levels!

Piling on too many loans can potentially lead to missed EMI payments, which can result in a fall in your credit score. Ironically, this can make it a lot more difficult to borrow money during crunch moments, when you have a real pressing need for liquidity.  For this reason, its critical to be extremely disciplined with your loan repayments.

Start 2018 by taking stock of all your EMIs and plug them into a simple excel sheet, along with their interest rates and outstanding principal amounts. Budget a comfortable fixed sum of money each month to paying off these loans systematically. Instead of always aiming to pay off high value debts such as your home loans; aim to extinguish the smaller loans first. Bringing down your total number of loans outstanding can lend you the necessary motivation and momentum to carry your debt reduction plan through to completion.

Resolve to direct unexpected windfalls during 2018 to making loan prepayments, even prioritising them over your goal-based investments. Free from the shackles of expensive EMIs, you will be in a much better position to chart the course for a solid financial future for yourself and your family.




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