Don't get cornered by cash crunch

Stopping regular payments like SIPs and insurance will hurt in the long run

The double whammy of high inflation and stagnating incomes is beginning to hurt consumers. Many, as a result, are ignoring important investment and insurance payments such as systematic investment plans and premiums of policies, say financial planners. Most people want to know if it is alright to discontinue with the monthly mutual fund investment when faced with an increase in the monthly loan repayment. Or, if it is necessary to continue with the insurance premium since there is no immediate return.

In a survey by Nielsen on ‘Consumer Confidence and Spending Intentions’, conducted in May this year, 22 per cent of the respondents said they look for better deals on home loans, insurance, credit cards and other financial products, as one step to save on household expenses.

Sumeet Vaid, CEO, Ffreedom Financial Planners, says people are looking to discontinue their monthly Systematic Investment Plans (SIPs) because there is no compulsion to pay. Whereas, in the case of a loan, you have to necessarily pay the equated monthly instalments (EMIs).
 

CASH COPING TIPS

• Best to continue with regular investments such as SIPs
• Dip into reserves to reduce outstanding loan and EMIs 
• Rollover credit card payment only as much as necessary 
• Pay off credit card debt as much as possible, to avoid high interest outgo
• Default on payments will lead to negative credit score and make borrowings in future more difficult

Imagine a scenario where the monthly loan repayment has increased from Rs 70,000 to Rs 90,000, due to interest rates going up. And, there is Rs 20,000 going towards a SIP. The typical tendency is to stop the SIP and divert it to the EMI.

Yet, this is not necessarily the best thing to do. Vaid’s advice is to continue with the monthly SIPs, but bring down the EMI by repaying the loan out of surpluses accumulated earlier. For instance, you have built a portfolio of Rs 40 lakh over seven years, through SIPs. Instead of stopping the SIP, you can reduce the EMI and repay the loan by withdrawing from the corpus.

Suresh Sadagopan, who runs Ladder7 Financial Advisories, also says although the easiest thing is to discontinue SIPs, one should avoid doing so, as SIPs give better returns in the long run.

During high interest regimes and high inflation, there are higher levels of discontinuance of insurance policies, says Subrat Mohanty, executive vice-president, strategy, customer relations and technology - HDFC Life.

“When interest rates go up, competing asset classes like bank fixed deposits appear more attractive than continuing investments in life insurance. Also, during such times, mortgage payments go up. So, you find people putting a mortgage payment on top of their priorities and withdrawing their investments in insurance to keep their commitments. Similarly, during periods of high inflation, the ‘real’ income reduces and people have less money to save. This leads to higher levels of policy lapses as well,'' Mohanty says.

Experts say investors tend to stop payment in investment-linked products like unit-linked insurance plans, but continue to pay the premiums for endowment products. “Nowadays we are finding it more cumbersome to convince people to buy term plans because it is perceived as an additional expense. We are also seeing people reducing covers for term plans, from Rs 1-2 crore to about Rs 75 lakh,” says Vaid.

For most investors, insurance is the least important thing on their lists. But all is not lost if you miss one premium. “If you have been paying premiums regularly for three years or more, insurers usually allow a grace period of three or five months over and above the date at which the policy expires. In addition, the policy remains active during the grace period, too,” says G N Agarwal, chief actuary, Future Generali Life Insurance.

During a slowdown, there is more roll-over of credit card repayments. A roll-over is when the customer pays the minimum amount needed to prevent a default. In such cases, it is best to pay off the debt as early as possible and roll-over only as much as is needed to. The interest rate incurred if you roll over would be in the range of 20-25 per cent. But if you pay it entirely, then you are not incurring any cost, says an official from a foreign bank.

Harshala Chandorkar, senior vice-president, Credit Information Bureau (India) Ltd, says, “Any inability to repay your loan later can negatively impact on one's credit history and credit score."

A negative credit score will make it tough for the consumer to borrow in future, because all banks rely heavily on scores assigned by credit information companies for appraising customers and approving loans.