A must-do list for investors

Events over the last few months tell us that 2017 is going to be no cakewalk for our personal finances. Banks are busy trimming their deposit rates, market interest rates are drifting down and small-savings returns are heading south. With the RBI in a pause mode, the debt-fund honeymoon of the last two years looks unlikely to prolong, too. The equity market is also having a rocky time, with the Fed rate hike and demonetisation stirring up fresh uncertainty. Demonetisation has already cast a pall on gold and real estate.

All this may make it tempting for you to avoid looking at your investments. But it is when the going gets tough that the tough investor must get going! This is the time to remind yourself of the core investment wisdom so that you do well financially no matter what.Here is a ten-point must-do list for you to keep your wealth-creation plans on track.

Step up your SIPs
Still sticking to SIPs of Rs 5,000 a month in the hope of getting to a Rs 1 crore corpus by retirement? Well, you need to revise both the SIPs and your investment goal upwards.

Let's assume that you can live handsomely on a Rs 1 crore retirement kitty at today's prices. If you're in your mid-twenties and have 35 years left for retirement, you'll need Rs 7.7 crore by the time you turn 60 to maintain the same lifestyle, adjusting that Rs 1 crore for a 6 per cent inflation rate. For a mid-thirties investor, Rs 1 crore of today will be the equivalent of Rs 4.3 crore at retirement. And if you're in your forties, you'll need Rs 3.2 crore at 60. In short, inflation turns your financial goals into moving targets.

To hit bull's eye, your savings and investments need to keep up with inflation, hence the need to step up your SIPs.
Consider a 40-year old investor who has SIPs of Rs 15,000 a month in large-cap equity funds. If he sticks to the same old SIPs until retirement, ignoring his pay increases as well as inflation, he will get to about Rs 1.97 crore. But stepping up his SIPs by just Rs 1,500 every year will get him to Rs 3.03 crore, a 54 per cent addition to the retirement kitty!

By how much should you step up your SIP? It would be ideal to peg it to expected pay increases. But if your employer is skimping on your annual increment, you should still step up your SIP at least by the prevailing inflation rate.

Stop idling your earnings
You go to a great deal of hardship to earn your monthly pay cheque. Then why let your money sit idle in a savings bank account, earning a miserable 4 per cent? Make it a habit to sweep your excess money into the growth option of good liquid mutual funds every month. After all, you can withdraw it anytime you need. Over the long term, the opportunity cost of letting your salary lie in your savings account can be quite steep.

With the long-term inflation rate in India at 5-6 per cent, you stand to lose 1-2 per cent to inflation every year if you stick to a 4 per cent savings account. By putting that money to work in a liquid fund, you can earn a 2-3 per cent real return over inflation. In fact, in the last ten years, despite the ups and downs of rate cycles, liquid funds have delivered a CAGR of 7.8 per cent, almost double the return on your savings account.

If you can hang on for three years, liquid funds are more tax-efficient than savings accounts, too. Under Section 80 TTA of the Income Tax Act, up to Rs 10,000 in annual interest that you earn from your savings account is exempt from income tax. The returns from liquid funds are taxable. But given the indexation benefits on the gains after three years, even if your fund earns you just 7 per cent per annum, your net returns will be far higher than those from a savings account.

Take the live example of a person who parks Rs 2 lakh in a savings bank account for ten years. At a 4 per cent annual interest, his kitty will grow to Rs 2.96 lakh at the end of ten years, with the entire returns being tax-exempt. With the growth option of a liquid fund earning 7 per cent, the same Rs 2 lakh will grow to Rs 3.93 lakh. Assuming inflation at 5 per cent over the ten-year period, only the net gains over and above this (Rs 67,651) will get taxed at 20 per cent (the long-term capital-gains-tax rate for liquid funds). After deducting the tax of Rs 13,530, the investor is still left with Rs 3.79 lakh - a nice 28 per cent bonus over the savings account!

Recently introduced mobile phone apps from fund houses such as Reliance Mutual Fund and Birla Sun Life Mutual Fund allow you to seamlessly link your salary account to a specified liquid fund and sweep your idle balances at the swipe of your smartphone.

Re-invest your interest, dividends
When your advisor tailors your financial plan, he relies heavily on the magic of compounding. It is only when your returns compound at the assumed rate that your investments can get you to the goal by due date.
But your financial plans can go awry if the interest payouts on your bonds or dividend payouts from your equities simply land in your savings account to be frittered away.
To avoid this, it is best to invest in the cumulative or growth options of debt instruments to make the most of compounding. Ditto for equity mutual funds. But if only the payout option is available with an otherwise attractive investment (say a share or a tax-free bond), ensure that you have a separate bank account to capture all income inflows and reinvest them.

Reinvesting dividends is quite important for your direct equity holdings, too. If you thought Indian stocks are all about capital gains, an evaluation of total returns (compounded returns assuming reinvestment of dividend) from equities over the last ten years tells a different story.

If you invested Rs 1 lakh in the Sensex basket exactly ten years ago (December 23, 2006), it would have appreciated to Rs 1.96 lakh by today with just capital gains. But had you diligently reinvested the dividends into the market every year, your investment would now be worth Rs 2.3 lakh. The gap between plain stock-price returns and total returns is even wider for the broader market. For the Nifty 500 Index, you would be left with Rs 2.2 lakh without dividends but as much as Rs 2.5 lakh with dividends reinvested!

Start a 'Swacch Portfolio' mission
Most of us know that it isn't a good idea to own scores of stocks and dozens of mutual funds in our portfolio. Successful investors, both in India and abroad (Warren Buffett and Ramdeo Agarwal, to name two), win by owning concentrated portfolios. This allows them to stick only to high-conviction bets and to track the businesses they own in great detail.

For the ordinary, part-time investor, owning a portfolio with a long tail is even more of a challenge. With so many bets to monitor, he may have no time to weed out losers or to nurture winners. This depresses the portfolio return.
Still, many of us end up with cluttered portfolios due to our behavioural traits. We buy funds or stocks out of sudden impulse. We fail to cut losses on our losers because that would mean admitting to mistakes. We also compound both errors by rushing to book profits on the winners, while hanging onto losers in perpetuity.

This New Year is a good time to take stock of your portfolio, while starting over on a clean slate. Forget your buy price for each stock or fund. Honestly answer just one question - if you didn't already own this stock or fund and had to make a decision about buying it today, would you go for it? If the answer is no, just get rid of it. In no time, you will be left with a swacch, manageable portfolio.

Exit insurance-cum-investment plans
With so many tempting things to buy, we know how hard it is to step up your savings. But before tightening your belt a few more notches, why not discontinue investments that are imposing a needless burden on you?

You'd be surprised at how much cash you can free up just by getting rid of sub-optimal investments that you've made in the past. Signed up for a long-term traditional insurance plan with a hefty premium in a weak moment? Surrender it, even if it entails a loss. What you've already invested is a sunk cost and there's no point in throwing good money after bad. Given that they invest in government securities and debt instruments, returns from traditional insurance plans don't top 5-6 per cent even in the best of times; expect even more anaemic returns with falling rates.

Unit-linked insurance plans from insurers are slightly better than traditional products on the cost and returns front. But their lack of transparency, inflexibility and low insurance component are still a big problem. Your money is locked in for five years, preventing you from bailing out if the fund performs poorly. Comparing your ULIP's performance with competing products is a pain, too, given that ULIPs aren't bracketed into well-defined investment categories.

Both performance monitoring and the ability to switch to better options are essential to win with market-linked products. Therefore, surrender all your investment-cum-insurance products and switch to open-end equity or balanced funds for more flexibility. Get a separate term-insurance plan to ensure life cover.

Increase your life-and health-cover amounts
Has your career graph risen vertically in the last few years? Congratulations! We are sure that your rising income has brought with it big changes in your lifestyle too. With your elevation, you and your family may have upgraded to a three-bedroom apartment, your children may have moved to international schools and you may have taken on new loans to fund a vacation or a fancy SUV that you have always dreamt of.

But all this means that your term-insurance policy badly needs an upgrade, too. The insurance cover you took five years ago may have been sufficient to cover your dependents' expenses at that time. But to make sure that your dependents don't suffer a dramatic climb-down if something happens to you, you will need a larger sum assured.
While estimating your new life cover, don't go by simplistic thumb rules such as 'ten times your annual income'. Instead, use online life-insurance calculators that scientifically calculate life cover based on your family's living expenses, inflation, the likely number of years for which you would like to support your dependents, outstanding loans and any other critical goals you may like to take care of. Believe us, a Rs 1 crore cover isn't over-the-top any longer!
With lifestyle ailments on the rise, don't forget to top up the health cover for yourself and your family, too. Even if official inflation rates have fallen to 5 per cent, factor in a 10 per cent inflation rate on your healthcare costs while topping up.

Health insurance is one financial product where skimping on costs (premium) can prove injurious to your wealth. As a rule, give a greater weightage to the quantum of sum assured and the breadth of health conditions covered when choosing a plan. Apart from this, screen the product for a low waiting period on pre-existing diseases, a wide network of hospitals where cashless treatment is offered and liberal sub-limits on room rent. Skipping the medical test isn't necessarily a good thing as it can lead to disputed claims later.

Get property insurance
When we read about natural disasters in newspapers, we often dismiss them thinking that 'it will never happen to me'. But data from the National Disaster Management Authority shows that India is highly vulnerable to a wide variety of natural disasters, ranging from earthquakes, floods, cyclones and tsunamis. Climate change is also increasing the frequency of such events.

Chennai-ites will tell you how big a setback their personal finances have received from two consecutive years of unprecedented nat-ural disasters. If last year's record rains and floods led to losses to cars, home appliances and furniture for home owners, this year's cyclone Vardah has felled trees, battered roofs and compound walls and generally wreaked havoc on home owners. The industry body Assocham has estimated the aggregate losses due to Vardah at Rs 6,500 crore.

Taking property insurance that protects both your home and its contents is the best way to disaster-proof your savings and bounce back quickly from such setbacks. Leading insurers offer comprehensive plans that protect your home and its contents against a variety of contingencies - earthquakes, floods, cyclones, fire and even acts of terrorism.

With a steady fall in property insurance premia in the last few years, such covers come at pretty reasonable rates, too. ICICI Lombard, for instance, quotes a premium of about Rs 25,000 for a five-year comprehensive cover of Rs 20 lakh. While taking property insurance, be sure to make a realistic assessment of the value of your home and its contents as that will decide the sum assured. Select a reinstatement cover (one that allows you to replace your belongings) as opposed to an indemnity cover (which only compensates for actual losses).

Digitise your documents
Even before Prime Minister Modi thought of demonetisation, going digital with your investments was a sound idea. While shares have been held in dematerialised form for many years now, bonds, NCDs, mutual fund units and Sovereign Gold Bonds have moved to the demat mode in the last couple of years. The benefits of holding your financial assets in electronic, dematerialised form are many.

For one, they are safer that way and you need not worry about theft, forgery, loss or misuse. Two, owning assets in electronic form also makes them portable and non-location specific. Floods may damage the property documents stored in your bank locker. But acts of god simply do not affect the dematerialised invest-ments in the safe-keeping of NSDL or CDSL.

Three, with the depositories now providing investors with a monthly consolidated account statement, you get a single-window snapshot of your asset allocation and the marked-to-market value of your holdings with all demat assets. This makes it easy to track your portfolio.

In fact, given the advantages, it makes a lot of sense to migrate from the physical to electronic form for hard assets as well. This means switching from jewellery to demat Sovereign Gold Bonds and storing scanned copies of your property documents as a backup.

The DigiLocker facility, which has recently been rolled out by the Government of India, may soon become your default 'locker' for all key papers (https://digilocker.gov.in/faq.php). The facility is designed to store a variety of documents issued by different government departments - from your CBSE marksheet to your driving licence and RC book - in electronic format in a digital account that is password protected.

Nominate
If filling up forms bores you to tears, chances are that you've been letting someone else, maybe your distributor, do the paperwork on your behalf. That may mean that most of your investments do not have a designated nominee who can seamlessly take over your portfolio on your death. But having worked so hard to build carefully thought-out portfolios to meet your family's needs, you would want a painless transition, isn't it?

It is never too late to remedy this. All financial-product providers allow you to add or change nominees at any time during the holding period of your investment. If you are accustomed to the digital mode, you can even do this exercise online.

However, do note that having a nominee for your investments does not obviate the need to make a will. A nominee only holds your investments/assets in trust immediately after your death until your legal heirs can claim it. To avoid multiple switchovers or disputes in the case of your death, it is best to designate your intended legal heirs as the nominees to your investments.

Teach your dependents about money
Are you that Superman or Superwoman who doubles up both as bread-winner and portfolio manager for your entire family? If so, that's a matter for concern, not pride.

Use 2017 to make the members in your family financially aware and independent. Encourage them to read financial media.

Open 'young saver' accounts for your children, where you can deposit their pocket money. This will make it inevitable for them to use the banking channel.

Get your family members add-on credit cards so that they judiciously use credit and build a credit history.
If your better half has been leaving her financial management to you, introduce her to online broking accounts and online SIPs. Teach your elderly parents all about online money transfers and internet banking.

Not only will this make them financially self-sufficient, they may end up managing your finances very efficiently, too!

This article was originally published on February 17, 2017.