The Diwali tradition calls for cleaning your home, so why not also clean up your financial house?
Use this opportunity to review your investments and liabilities, eliminating unnecessary items and adding what may be missing. And while you are at it, take steps to weed out unnecessary expenses.
“Every rupee that you’re not investing, you’re losing out on that compounding effect” for your long-term returns, said Priya Sunder, co-founder of Bengaluru-based financial advisory firm PeakAlpha Investments.
Here are the areas in your financial closet that need attention:
Investment portfolio
Long-term investors shouldn’t be tinkering with their investments often, but it’s important to review your portfolio at least once a year.
Check your asset allocation—the percentage of your portfolio invested in various assets, such as stocks, bonds, and precious metals. Does this allocation fit your risk tolerance level? If stocks, for instance, have become a much larger portion than you’re comfortable with, consider adding bonds and trimming stocks, but be mindful of tax implications. Otherwise, you can rebalance by way of future allocations to bonds.
One common problem that financial advisers encounter is that investment portfolios often contain too many mutual funds, stocks, or bonds. Sunder said people often buy investments because someone told them or because they’re trendy, without considering if they are needed to achieve their financial goals.
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“It’s like literally making a khichdi out of things that don’t make sense for you,” she added.
Vishal Dhawan, co-founder of Plan Ahead Wealth Advisors in Mumbai, said sometimes new clients come with 30, 40, or 50 mutual funds in their portfolios. “They struggle to manage their portfolio because they can only track so much.”
Often, he said, the funds hold the same investments. Owning five large-cap stock funds doesn’t necessarily provide any diversification.
“A neat and tidy portfolio of 8-10 funds is good enough,” said Sunder.
Also, check if a fund has been underperforming its benchmark for a while and decide whether it still deserves a place in your portfolio.
To decide which investments to get rid of, Dhawan suggested asking the question: “What role does this play in the context of my financial plan?”
If the investment doesn’t serve a unique purpose, consider selling it. But be mindful of tax implications. If large sums are involved, it may be wise to stagger your exit over multiple years, according to advisers.
Dhawan also suggested shutting down old bank accounts that are hardly used.
If a large amount of money is lying in a savings bank account, which currently pays a mere 2.5% interest, consider moving that money to a linked fixed deposit or another better-paying investment.
Loans
“There’s also a need to look at the debt side of your balance sheet…to see whether there is some efficiency” to be had, said Dhawan.
The Reserve Bank of India has been lowering benchmark interest rates this year, but that isn’t automatically passed on to all home loan rates. So, check where you are at, and negotiate a lower rate with your lender if needed.
If you’ve changed jobs, check if your new company has tie-ups for lower home loan rates for employees.
Consider refinancing your loan if you can secure a new loan at a low enough rate that the cost of switching is less than the interest savings you will earn over the remaining loan tenure.
If you have a high-interest personal loan or credit card debt, advisers suggest paying that off at the earliest, even if it means you have to break a fixed deposit (FD) or sell a small investment.
“If you have a fixed deposit that is giving you 6.5% and you’re paying 14% interest, why are you not using that FD to clear that loan?” said Sunder. “The more of these loans you take, the more you are tying yourself down,” she added.
If you have more than 2-3 credit cards, consider whether you need so many. One missed payment on any of these can be very costly.
Insurance
It’s also important to review your insurance policies with the goal of ensuring that you have adequate insurance for your current circumstances.
“Sometimes people will be over-insured; often they’ll be under-insured; so, they need to look at that afresh,” said Dhawan.
A health insurance policy bought years ago may not be sufficient today because medical costs have risen drastically in recent years. The same goes for life insurance policies.
Sunder said she has seen instances where someone owns a pension product from an insurance company, but when that matures, they receive a very small amount, such as ₹2,500 per month. Review the terms and implications of the plans you own to understand what you can expect in the future. “Better you realize it today than 15 years later,” she said.
Meanwhile, create your own short-term risk cover, in the form of an emergency fund, which can come in handy in case of a sudden change of circumstance or a job loss. This reserve should ideally be equal to six months’ worth of your living expenses, kept in a linked FD or a liquid debt fund.
Expenses/auto-renew subscriptions
In an ideal world, we would keep a close watch on our expenses so we know exactly how much we spend on each item, and thus can eliminate unnecessary expenditures.
But short of that, it isn’t a bad idea to go through your bank or credit card statements once a year to see if there are any recurring or unwanted charges that can be cut back.
One typical area: subscriptions that you hardly use, which are set to auto-renew.
This could be for a TV channel, a food delivery app, an e-commerce or a cloud-storage service. It might have started out as a small amount, so you forgot about it, but over time, the rupees add up.
Worse, the service may have raised its price or ended its free trial. So, you could be paying a lot more than you might imagine.
Digitize and organize
Earlier this year, Chandigarh resident Rattan Dhillon, while cleaning his cupboard, found decades-old physical share certificates of Reliance Industries, which turned out to be worth lakhs of rupees!
Most of us won’t be this lucky, but it’s still a good idea to go through old paper files and documents, including those belonging to your dependent elderly parents or documents received in an inheritance, to figure out what is what.
Old physical shares, mutual funds, and other unclaimed assets can be recovered with the help of various agencies. For instance, the Investor Education and Protection Fund Authority can assist in recovering unclaimed shares and dividends.
Get rid of all irrelevant papers. For the rest, prepare an organizing and filing system.
Important papers related to property, loans, birth, marriage, and death certificates can be digitized and stored on a secure hard drive or cloud storage service, with multi-factor authentication.
As part of the process, also organize your finances for after you’re gone.
Make nominations for your investment accounts and banks, and create a will that lists all that you own and how you wish it to be distributed. It will save a lot of trouble for your loved ones.
