It will help to have a more nuanced approach Instead of selling things indiscriminately
It’s bad when we do not have an emergency corpus to take care of our contingencies when we lose our jobs or face a drastic income cut. Many people have had to face hardships on the money front in this pandemic. It’s worse when we sell our family silver, indiscriminately.
But what can one do? Equated monthly instalments (EMI) and expenses such as school fees, a medical emergency are unavoidable. Instead of selling things randomly a more nuanced approach may help.
How much cash do you need?
How many shares, mutual funds or bonds you need to sell depends on how much you need to raise. Take a stock of your cash needs over the next year. This should include the amount of money you need for your living expenses, EMI payable, money payable towards school fees, insurance and other unavoidable expenses.
Before you start your garage sale, check if any of your instruments are getting matured in the next 12 months. These could be your fixed deposits, old life insurance policies and fixed maturity plans and so on. You might not really need to sell your existing instruments if you are going to get some redemption money. You may choose to review your situation every month, till the situation improves.
High cost, low yield insurance policies should be a start
Health and accident insurance are a must. But many of us have money lying in traditional, moneyback insurance or unit-linked insurance policies (ULIP) that promise to pay us some return at the end of the tenure. If you have too many of such policies running, you should consider selling some of them. “If your ULIP allows, do avail premium holidays till your cash flows improve,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Amol Joshi, founder of Plan Rupee Investment Services recommends surrendering old ULIP policies if they have in-built large expenses and traditional life insurance policies since they offer four to five per cent returns over a very long term. Besides, high premiums in unproductive policies can hardly burn a hole in these times.
However, not many will have the courage to surrender their traditional life insurance policies. “Policies that have run five years or so can be surrendered. This will curtail your losses and will bring some money in hand,” says Pankaj Mathpal, founder and managing director, Optima Money Managers. For policies that are run almost halfway through the tenure, but you cannot service them anymore can be made paid up, by writing to life insurance companies.
This ensures that you will be paid reduced benefit at the time of original maturity date, in line with your premium paid and you need not have to pay the future premium. “If your policies are maturing in a year or two, try paying a premium, even by borrowing against them. It will continue your life insurance cover and you will get the maturity proceeds when the policy matures after adjusting for loans outstanding if any,” he adds.
Now comes your family silver. Take a close look at your investment portfolio; shares, mutual funds, bonds and so on.
Suresh Sadagopan, founder of Ladder 7 Financial Advisories advises to look out for instruments that are not commensurate to your risk profile. In other words, have you been investing in a highly-risky instrument but you are deeply uncomfortable with the ensuing volatility? For example, if you have invested all your money in small and mid-cap funds in 2018 looking at the past returns, your portfolio must have been in bad shape. Ideally, one can have exposure around 20 per cent to these funds. “Some of your existing investments can be monetized after taking into account your asset allocation and your risk profile,” says Suresh.
You could have also gone overboard with your investments in a particular asset class when the going was good. For instance, you could have bought a sector fund in the past, despite having no investment view of it. Sell those.
If your portfolio doesn’t have such flaws, look at other aspects of your portfolio. “Sell what is liquid and can be sold near the fair value,” says Joshi. Fixed deposits and debt funds, especially liquid funds, can be sold in such cases. Often, financial planners say that investors leave residue amounts in various liquid funds after their systematic transfer plans are done with.
Give it a bit of thought though. “Look at exit loads, tax implications and its volatility while choosing the investment to be sold,” says Dhawan. Say, you have a banking and PSU bond fund which you have been holding on for the last 32 months. And an equity fund for the past five years. Your equity fund would have corrected sharply in March due to the coronavirus market crash. Which one should you sell?
Your Banking & PSU bond fund is just four months shy of qualifying for long-term taxation. And going forward, it is most likely to be the least risky of the two. Besides, we never know when equity markets would bounce back, so your equity fund’s returns- at least for the next year or so- are uncertain. A systematic withdrawal plan for your equity fund, in this case, makes more sense.
Selling your bonds in the markets is also another option. But calculate the fair price of the bond you are holding and place a limit order. Avoid placing market orders if you are holding large quantities.
Loans against securities
If you do not have liquid assets to monetise, you can also consider taking a loan against them. “Loan against securities, especially loans against life insurance policies can help you raise money,” says Mathpal. These loans are cheaper than personal loans.
For life insurance policies or a non-convertible debenture (NCD) maturing in the next three to six months, you can take a loan against them or some other investments. Selling securities that are so close to maturity makes little sense. If you fail to repay such loans, the underlying asset will be taken over by the lender. Hence, use the loan route carefully.
Physical gold holdings too can be sold to raise money. However in some areas where the jeweler shops are closed due to lockdown, it will be difficult. Though real estate is difficult to sell, you should pursue it.Instead of looking at each of the investment in isolation, do take into account the big picture. If you have assets, a calculated approach to liquidating them can help you sail through without much pain.