5 Personal Finance Actions You Should Consider Taking At The Start Of The Year

Exit costly ULIP plans

If you invested into costly ULIP’s more than five years ago, now would be a good time to exit them. The equity markets have had a good run, and it’s likely that your ULIP’s hefty costs would have been covered by now – and then some. Don’t make the mistake of succumbing to inertia and continuing to throw good money after bad in the process. Use this window of opportunity to firmly exit any ULIP’s that have annual costs exceeding 2% (excluding mortality costs), and move the redeemed moneys into Mutual Funds instead. Don’t worry about the loss of life cover – in all likelihood, it’ll be too miniscule to even matter.

Book profits in equities

With blue chips rising over 25% (on average) and midcaps more than 40%, you may have reaped handsome returns on your direct equity or equity mutual fund portfolio in 2017. Instead of falling prey to the all too familiar syndrome of increasing your equity allocations as stocks become more expensive, go against the grain the way pros do. Reduce your equity allocation by 25%-36% at the yearend by booking profits. Concentrate your direct equity portfolio into thematic bets, as 2018 is unlikely to witness a secular bull market. Large cap stocks in the financial, infrastructure and FMCG space are worth considering.

Add some duration to your debt portfolio

Long Term Debt Fund and GILT Fund investors may have been stung by the recent surge in yields, but this also provides investors who had heeded my warnings and stuck to accrual based funds for the past year, with an opportunity to benefit from the recent fall in bond prices. The second half of 2018 is likely to bring a lot more clarity on the future of the debt markets, which is pricing in a lot of bad stuff right now – high inflation, continued rate hikes by global central banks, and an increased supply of PSU debt due to the bank recap, to name a few. Use the next 6 months to stagger at least 25% - 30% of your debt portfolio into long term debt funds via SIP’s or STP’s.

Plan your tax savings over the next fifteen days

Don’t wait until the last moment to deploy your tax saving moneys for the year. Plan ahead and complete your tax saving investments in the first two weeks of the year instead. Calculate your section 80C gap and deploy the moneys into ELSS funds in three equal tranches, to avoid the risk of markets sliding after you invest. Take up a comprehensive health insurance plan if you haven’t already – you can avail a deduction of up to Rs. 25,000 per year on your Mediclaim premiums. Additionally, invest Rs. 50,000 into the NPS (National Pension Scheme) to claim an additional deduction of under Section 80CCD. Just make sure that you go in for the most aggressive equity allocation in your NPS (The Life Cycle – 75 option works best if you’re in your early thirties)

Steer clear of the Crypto Rally

While Ripple creates ripples, Ethereum soars into the ether, and Bitcoin rockets into orbit, play the dispassionate observer and do not succumb to the temptation of committing your hard-earned funds into an ‘asset class’ (debatable) that has so many grey areas right now that it’s tough to really predict what price they’ll wind up at one year hence. While cryptocurrencies may well be the future of exchanging good and services, the current meteoric rise in their collective prices is nothing but a speculative, liquidity fuelled rally that will almost certainly end painfully for many late entrants. I have friends who are sitting on 30% losses in their Bitcoin holdings in a month, and are considering exiting! If you simply must dabble, do so systematically in small tranches, using a trusted wallet. Wait for more clarity to emerge on the future of the actual utility of cryptos as a medium of exchange, before you decide to make it a part of your strategic asset allocation.