Do a Recce before the Recession

Publication: Business Standard, Mumbai; Section: Financial Planning; Date: October 19, 2008

Reduce high-cost loans, create a contingency fund and play long term.these are the only mantras to survive during a slowdown.

Headlines across most newspapers, a few days ago, were about 1,900 employees being laid off at Jet Airways. Of course, the company’s chairman, Naresh Goyal, did a volte-face the same day and asked employees to join back from the very next day.

But the reality is that there are troubled times ahead of us. Doomsayers are already talking that the “Great Depression”, which started in 1929, is already on us. And for many, it has just started.

Internationally, there are already stories of lay-offs and salary cuts for almost a month or so. And though the situation has not yet directly impacted India, sooner or later, there will be some trickle-down effect.

Investors in the stock market and mutual funds have already seen great erosion in their wealth. That is, the Sensex is down from the highs of January, when it was over 20,000 points, to close at a dismal 9,975.35 points this Friday – down a whopping 50 per cent in just 10 months.

And the last 20-25 per cent decline in the stock market has been so swift that it has taken just seven trading sessions to achieve this feat. To top this, the entire banking and financial system is under a lot of duress. There is a crisis in terms of confidence, with banks sometimes unwilling to lend short-term money to other banks and companies. Does this mean that we are headed for doom and nothing can be done about it? Certainly not, in fact, the great news is that there are steps that we could possibly take now to better prepare ourselves for some tough times ahead.

Though there is no silver bullet or short-cut that can save you from a financial crisis of such nature, because no asset can protect itself or generate real returns in a panic situation, there are some key things that a family can do to ensure that they are ready to weather these uncertain times.

Step one: Stay Calm. Don’t panic and make rash decisions. Even though you know that selling shares of good companies or mutual funds is the worst thing to do, it is often the first thing that comes to your mind.

Of course, this is not to say that if there is money in high-risk, high-return mid-or small-cap funds or stocks, you should not move them. But take a call after you have properly analysed losses that would have incurred in the process.

Yes, these are times when you have to be more alert, but translating your alertness into immediate action need not be necessary. You should opt for rational decisions in such times.

Step two: Just a while ago, you would have got calls from head hunters and felt ultra-confident about yourself.

But with changing times, it is more likely that these calls will slow down, and so will hikes being offered by companies that are recruiting. Even your own company may not give much of a hike in the next year. But it’s time that you do not look at hikes and increments. Instead, be defensive about your existing job.

There are several ways of doing this – right from taking in more responsibilities to improving your skill sets. This could mean putting in more hours, if possible, and working harder and smarter. Be prepared for situations, where your company is pruning its existing workforce and more workload may be coming your way.

Step three: Create a contingency fund aggressively, if you have not already done so. It is far more important now to have that additional cushion. Have at least 4-12 months of expenses in the liquid form, that is, in savings account and fixed deposits, at all points of time.

If only a single member of the family is working then it is imperative to have more funds in the emergency kitty. Additionally, take stock of what you can sell in such markets without incurring a loss.

Can you borrow against fixed deposits, take a loan against your LIC policy and withdraw from PPF or EPF? Do you have gold that you could possibly sell? Evaluate all possibilities and be ready for all contingencies.

Step four: Perhaps, not taken too seriously, but the most important point – reduce your expenses. There are two types of expenses: mandatory (groceries, child’s education, home loan) and voluntary (entertainment, vacation, eating out and others). While there might be no way of scaling down mandatory expenses, voluntary ones can certainly be scaled down.

However, even dealing with your mandatory expenses smartly can help matters. For instance, if you have high-interest home loans (most would have gone up to 12.25 per cent), you can look at refinancing it as there are banks that will offer you a loan for around 10.00-10.5 per cent.

This can result in a reduction of the equated monthly instalment (EMI) and improve your cash flows. But it comes at a cost. So you will need to do a cost-benefit analysis of the loan transfer before going for it.

If you are paying very high interest rates on credit cards and personal loans, you could do a 0 per cent balance transfer for three months (or slightly more), but refrain from using them till you clear the debt.

If you really need to raise cash, opt for relatives instead of institutions or use your fixed deposits, real estate and other investments.

Step five: Have a proper savings budget and continue with your investments in PPF, EPF, SIPs and gold. Most importantly, this is not the time to be adventurous for investing in short-term equity.

Doing all the above means you are much better prepared to tackle the bad times. It’s important to pre-empt rather than take drastic measures in the future.

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