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Preparing to invest—cash flows and emergency funds

LiveMint logoLiveMint 29-03-2017 Staff Writer

The beginning of a financial year is usually the time people rethink their financial lives. Mint recently organised a half-day conference on strategies for personal finances in the new year. The first panel discussed options to manage cash flows and emergency requirements better. Panel two looked at insurance. Panel three at investment in mutual funds. Panel four at alternate investments and panel five discussed long-term products and strategies.

The panel discussing options for managing cash flows and emergency funds had Abhishake Mathur, senior vice-president and head-investment advisory services, ICICI Securities Ltd; Adhil Shetty, founder and chief executive officer, Bankbazaar.com; Nitin B. Vyakaranam, founder and chief executive officer, Artha Yantra; Sundeep Sikka, executive director and chief executive officer, Reliance Nippon Life Asset Management Ltd; and Suresh Sadagopan, founder, Ladder7 Financial Advisories.

It was moderated by Vivina Vishwanathan, editor, Mint Money Digital

Vivina Vishwanathan: Among the various money boxes that an individual has, the most important are those for cash flow and emergency. Why are these so important? 

Suresh Sadagopan: Before investing, we must talk about liquidity. Every person requires some amount in the bank. But many people think they need to keep a whole lot of money in the bank. For liquidity, we suggest that people keep some amount in liquid funds or short-term funds, or for those who are not comfortable with mutual funds, we suggest short-term deposits or at least flexi deposits. 

Nitin Vyakaranam: Most of us underestimate the complexity of personal finance, especially cash flow management. For example, when we decide to buy a house, this decision impacts multiple things in our lives such as: need for insurance, a Will, the way you save and the fundamental cash flow.

While the financial industry works in silos, connecting all of them makes cash flow management tough. Optimal use of resources is needed. Using technology, we can improve cash flow by almost 21%. An individual takes about 36,000 financial decisions in about 20 years, all of them are interconnected. 

Abhishake Mathur: Even in the US, companies are moving into financial planning because we all feel this is the cornerstone. Cash flow management defines all the decisions in finance. 

Vishwanathan: How do you ask the right questions? 

Mathur: There is no simple way to do this. In fact, collecting and processing the information takes the maximum amount of time. 

Vyakaranam: We see that most people have never done this exercise. They are reaching out to a professional adviser for the first time. They are shocked by the amount of information that is required. So, the first exercise is the most beneficial for customers because it helps them understand where they stand. Also, we can invest all we want, but if we don’t manage the risks, we will end up breaking our egg nest, maxing out personal loans and credit cards, and starting all over again. About 97% of Indians will go bankrupt if there is a financial emergency. Technology helps you set the milestones, and get the data. Yes, people crib—I won’t give this much data. But when they add information in real time, they get response in real time. 

Mathur: Collecting information is the toughest part for an adviser in terms of effort and time. So, we collect information in a tiered way. Some is mandatory, and then there is an additional level where if the customer gives the details, it adds to the accuracy. 

Vishwanathan: Sundeep, you offer debit cards with liquid funds. How have you been able to use technology to push this product? 

Sundeep Sikka: Financial planning liquidity management is quite complex. But it has been there since the ages. Today, most Indians are not managing their cash flow well, because they confuse savings with investments. For example, many people believe that money lying in savings accounts and even fixed deposits are investments. Many others are over-invested, and when they need liquidity, but they don’t have it. Surprisingly, liquid funds are used more by companies than by individuals—99% of companies that invest in mutual funds invest in liquid funds for liquidity management; but 99% of investors invest for the long term. This trend will change with ease of transactions. This is why we launched a debit card with a liquid fund. For individual investors, getting that 2% extra was hardly anything, and they had to go to the fund house or the adviser to ask for their money. All investors who come in through the mobile application ‘Simply Save’ have an average holding in liquid funds that is three times of a normal investor’s. They transact 5-7 times in a month. What changes the behaviour was not the extra interest but the ease of transacting and convenience.

Adhil Shetty: One trend we are clearly seeing is the use of mobile phones. On an average, we are seeing 15-16 million people coming and saying we are looking for financial information. This has been an eye opener. A young person who has a doubt says let me read about it on my mobile phone. That has become the normal process.

What we are trying now is that if the investor has come this far, can he now access the product without paper. The person is already online, so we are grappling with the question whether we can deliver the product in 15 seconds, without paper.

Vishwanathan: Can traditional style of planning and technology-based planning work together for individuals? 

Sadagopan: For a consumer, it should be seamless delivery. Technology can ease the process for a client. 

Vyakaranam: It is not one versus the other. India is in a market-building phase. So, all of us are bringing in different perspectives. 

Sikka: Technology has to be seen as an enabler. Tradition and technology will co-exist. There is ‘new India’ and there is ‘old India’. The traditional part will use technology for easy on-boarding and easy servicing of these investors. And online platforms are for those who are more savvy and use smart phones for everything. 

Vishwanathan: But there are glitches and challenges in using technology too. 

Shetty: What we have been able to deliver is paperless. We have realized that the customer has been trained by Amazon. They want that frictionless experience. At present, the government and various regulators are able to provide paperless if you are able to do eKYC (electronic Know Your Customer) or have already bought a fund. But according to the new Central Registry of Securitisation Asset Reconstruction and Security Interest of India (Cersai) regulations, for cKYC, there is still a paper trail ( as per central KYC regulations of Cersai). We need to be paperless for everyone. 

Sadagopan: Without KYC, you cannot invest. So, there is a problem there. Clients also have a mindset problem in terms of investing, and which are well founded. Some are concerned about the kind of details going online and its security. These have to be addressed. Product manufacturers have products that can be bought online. But there are some regulatory issues such as requiring paperwork. So, these are not issues with technology but with the environment, including from the client. These will get ironed out sooner than we believe. 

Vishwanathan: How much do you think should be a person’s emergency fund? 

Mathur: The emergency fund, or the sink fund, depends on how much is the variation in your salary. We usually recommend 3 months’ amount. The reason for this is that if you don’t have an emergency fund, you tend to disturb your core portfolio, which is an equity portfolio and for long-term goals. 

Sadagopan: I want to distinguish between liquidity and emergency needs. A spike in expenses can be taken care of through liquidity. An emergency can be a person in the family needing medical care. For that, one has to estimate an amount: it can be Rs5 lakh or Rs25 lakh. Or, someone may need financial assistance. Here also, one does not know what the amount would be. Typically, we suggest short- to medium-term funds for that because we have seen in our practice that emergency funds tend to remain there for a long time. So, at least till the time it is there, we want it to earn a reasonable return. 

Vyakaranam: One should look at emergency funds like a pyramid, and one part of the base has to be risk management. Insurance is another big part. Between the age of 35 and 40, every one of us will go through an emergency. All of that can’t be supported by an emergency fund. Various products have to fit your requirements. It’s not easy and not many people talk about it.

Watch the discussion at: bit.ly/2nutvvm

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