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Swachh Portfolio: 4 Tips To Clean Up Your Finances This Diwali

Since times immemorial, you have been cleaning up your house around Diwali time and decorating it with lights.

This year (and, of course, also in future) make it a habit to clean up your personal finances and investments too, along with your dream home and brighten up your financial future.

Here is the "4 R" formula, for a quick and efficient cleaning up of your personal finances.

1. Reduce the credit card and debt burden

a. List down all your borrowings, credit card outstandings and other financial obligations.
b. Arrange them in the order of decreasing interest rates.
c. Prioritize repayment of high-interest loans.
d. Arrange additional funds for prepayment, by selling investments with poor returns.
e. Take top-up loans against property and other assets to replace high-interest debt.
f. If you have no assets, replace the high-interest credit card balances with comparatively cheaper personal loans.

2. Re-balance the portfolio asset allocation

a. Categorize all your investments into four primary asset classes i.e. property, equity, fixed income and gold.
b. Based on your financial profile (i.e. income, objectives, tax, risk appetite, liquidity, etc.) work out the most appropriate asset allocation.
c. Sell the assets where your exposure exceeds the prudent levels. And move this money to other assets where you are under-weight.
d. Ensure that the tax liability on account of such restructuring is minimal.
e. Review, re-balance and realign your portfolio once every 6 months. Each asset class follows a different growth trajectory. So, it is quite natural, that your asset allocation will change with the passage of time.

The "4 R" formula for a quick and efficient cleaning up of your personal finances.

3. Restructure the insurance cover

a. List down all your high-premium low-returns inadequate-cover traditional insurance plans such as the endowment or moneyback policies. 
b. Policies bought in the recent years, may be surrendered. It is better to take a hit now, rather than living with the bad investments for decades.
c. Policies in the mid-term of their total tenure, may be converted to partly paid-up policies. Thus, instead of paying premiums in the future, you can invest the same money in better investment products.
d. Policies that are due to mature in the next few years should be continued with. It is too late now to salvage the situation.
e. ULIPs are of numerous types. Therefore, a standard recommendation is not possible. Each plan has to be individually evaluated, before deciding on the future course of action.
f. Take adequate life insurance cover through a Term Insurance Policy
g. Take adequate health insurance cover through a mix of conventional mediclaim policy, critical illness cover and a super top-up health plan.

4. Remove under-performing FDs, stocks, mutual funds, etc.

a. Make a detailed list of all your investments.
b. Have a separate list for FDs/Bonds, mutual funds, stocks, etc.
c. Compare the performance of each investment with the "right" benchmark and the "right" peer group.
d. Arrange them in an order from worst performers to the best performers.
e. Focus your attention on the worst FDs, Bonds, mutual funds, shares, etc.
f. Evaluate the reasons for their under-performance.
g. If the future also looks bleak, remove them from your portfolio.
h. Either shift this money to existing investments. Or add different types of investments that would add value to your overall portfolio.

In other words, henceforth you must emulate our PM Shri Narendra Modi and launch the Swachh Portfolio Abhiyaan... every year.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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