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Finding the correct balance

Struck by the slowdown, those in the 25-35-year age group have shown surprising resilience. These children of good times have restrategised their finances so well that all investors can learn from them.

They say that the way one faces a major crisis is the measure of one's character. If the savants are right, those in the age bracket of 25-35 years have nerves of steel. They haven't balked at the first economic slowdown of their careers. Instead, they are restrategising toward the goal of wealth creation. It is a bold decision, considering what is at stake.

Before 2008, they were the envied lot. They hopped from one high-paying job to another, splurged with trademark flamboyance and invested early to build a nest egg. It was to be the time of consolidation. The zeros were supposed to add up in their equity portfolios, promotions were to push them to high-flying positions, salary packets were expected to get fatter and they were to stay in dream houses.

The Younger You Are...
...the greater is the opportunity loss of wealth creation. Here's how:
Monthly SIP: Rs 5,000 | Growth p.a: 10% | Time period: Till the age of 50
If investment period missed is 25-27 years, opportunity loss is: Rs 18,70,635
If investment period missed is 30-32 years, opportunity loss is: Rs 11,61,517
If investment period missed is 34-36 years, opportunity loss is: Rs 7,93,332
Assuming investments are made at the end of every month. Corpus includes investment in 50th year.

Obviously, it hasn't turned out that way. The challenges for this age group are as novel as the opportunities were. New jobs are rare to find. Old salaries are even rarer. For those already in the workforce, job insecurity is at an unprecedented high at a time when they were poised to jump high on the corporate ladder. The risks taken during the boom time are threatening to be nullified. The lifestyle backed by scorching salaries is set to vanish. This gamut of problems is accentuated by the nearly-finalised personal plans such as marriage, starting a family or shifting to a bigger house.

Unique problems must have equally unique solutions, which is true of this generation too. It is not good news as this means they cannot emulate their parents' strategy and park money in safe havens till the gloomy clouds roll away. Neither do they have a sizeable corpus. Those in the 25-35 age group can't afford to behave like their younger colleagues, who can easily postpone investing decisions or bet on risky instruments. More importantly, they have no option but to seek more investment opportunities.

So, the fact that many 30-somethings have found appropriate strategies is remarkable. We decided to bring them to you through the minds that have formed the plans. In the next few pages you will read how young families have reduced expenses without compromising on lifestyle, invested in equities with a generous dose of debt for security, and hunted out alternative employment avenues when regular jobs are scarce. We have added our bit, but the fine-tuning is minor.

It's still too early to make a final judgement, but the children of the good times seem to have mastered the bad times too.

Rahul Gupta

Case Study

Rahul Gupta
Age: 31
Profession: Area manager
Place: Faridabad

Combat strategy:

  1. Reduced investments from about Rs 30,000 to Rs 15,000 a month and reallocated the money to build an emergency fund.
  2. Is averaging out the cost of mutual funds and stocks by buying more at lower prices.
  3. Is moving out of risky investments to the relatively safer blue-chips.

"Now I am more conscious of the risk-reward ratio of financial products. This is why I have moved from mid-cap funds, which are more risky, to large-cap ones."

Tempered Aggression

Allocation Action Plan
How to restrategise in a downturn as per your portfolio composition:
 
For Mr. Belligerent (100% equity)
Move corpus for short-term goals to debt.
Move out of equities partially; reduce exposure by about 30%.
Get out of risky mid- and small-cap stocks and funds even if it means booking losses.
Do not venture into day trading; markets are very volatile.
 
For Mr. Scared (100% debt)
Stick to debt instruments for meeting short-term goals.
Get out of tax-inefficient debt instruments first.
Invest in equities immediately starting with mutual funds.
Initially, put money only in equities till the proportion of debt falls to the target level. Then invest in debt.
 
For Mr. Balanced (equity & debt)
Clean up portfolio of ultra-risky mid-caps and small-caps.
Re-align portfolio to the predetermined asset allocation by investing more in equities as its value would have eroded.
If you have a chunky debt cushion, consider increasing equity exposure.

I am scared. But I don't want to be," says Rahul Gupta. No, he is not about to go bungee jumping for the first time. Gupta is referring to the first slowdown of his career. The juxtaposition of danger and opportunity in the market evokes a similar combination of fear and thrill as adventure sports. In the end, the prospect of future gain triumphed over his fear. Despite a 40% drop in his portfolio value last year, Gupta decided to jump. The 31-year-old area manager in an MNC continues to invest in equities. "I don't want to regret staying out just because I didn't have the guts," he says.

His is a gutsy generation, it seems. Gupta's peers haven't deserted the markets either. MONEY TODAY spoke to young professionals belonging to different income groups and almost everyone is investing in equities. Some, like 30-year-old Shruti Roy, a Delhi-based manager in an insurance company, have actually increased their equity exposure in the past few months. She has invested about Rs 3 lakh in Ulips with heavy equity components. "Weaklings will perish in this environment. The bravehearts will make millions," she says.

Had the 30-something crowd retained this fervour for equities during the downturn, it wouldn't have seemed out of line. This, because it has seen only the boom years and wasn't expected to restrategise. But the surprising fact is that it has. Using temperance as a favoured tool, it is investing in equities but is also building a safety net alongside. The equity blitzkrieg is moderated by more debt investments. A meaty emergency fund is the discovery of the bad times. Take the case of the adventurous Gupta. He has reduced his monthly investments from about Rs 25,000 to Rs 15,000 a month to build an emergency corpus.

Financial planners unanimously ratify the strategy of these youngsters. If you are below 35 years, don't even think about getting out of equities completely or discontinuing the SIPs. Take risks, but don't be reckless. Of course, an allequity portfolio requires an instant support of debt instruments, which should constitute 20-30% of total investments. In case you don't have the lump sum to fix the skewed asset allocation, withdraw money from equities and redirect it to fixed-income instruments.

This means booking losses on the equity investments, but Swapnil Pawar, head of solutions with Karvy Consulting, suggests that you bear this pain. Even for those who have the right equity-to-debt ratio, it is essential to weed out the ultra-risky portions of your portfolio. On top of the hit-list are all small- and mid-cap stocks and funds. Even sector funds may not be a good idea when all the chips are down. Vivek Jain, 31, a senior business analyst with a software company, has followed this principle to the T. He has thrown out the sector and mid-cap funds and has reinvested the money in large-cap ones.

Can You Afford A House?
Lower property prices are tempting young investors to buy a house. But don't take this decision without factoring in the following situations:
Assumed monthly income: Rs 55,000
Assumed home loan EMI: Rs 25,000
.
Will you be working in the same city?
If you are moving from a small town to a big city, you will have to pay rent and an EMI, which can upset your budget. If you earn a rent of Rs 7,000 from the house bought on loan and pay a rent of Rs 17,000 in the new city, the net addition to your monthly expense is Rs 10,000. Assuming other monthly expenses of Rs 15,000, the money left for investments reduces to Rs 5,000 only.
 
Will you take a sabbatical to study?
Having no income for a year or two means that you should have a corpus that pays the EMI. If you take a sabbatical of one year, the total money required will be Rs 3 lakh. To build this corpus in three years, you will have to invest an additional Rs 7,180 every month. For a one-year time horizon, the required investment swells to Rs 23,875 every month (assuming annualised growth of 10%).
 
Are your expenses likely to surge?
If you get married or start contributing to your parents' expenses, the home loan EMI can become a burden. Let's assume your current monthly expenses are Rs 20,000. The investible surplus is Rs 15,000. If an expenditure of Rs 10,000 is added to your budget, the total expenses surge to Rs 30,000. Therefore, you are left with a paltry investible surplus of Rs 5,000.

However, some planners like Jaideep Lunial, director of Wealth Gyan, maintain that you can retain risky investments if you do not require the money in the long term and can stomach high volatility.

For fresh equity investments the vote is unanimous: large-cap funds and blue-chips. P.V. Subramanyam, a financial trainer with Iris, places his bets on index funds to ride out the downturn. These investments can become the mainstay of your portfolio. Nibble on the riskier products once the good times return.

While making incremental investments in equities, the temptation of averaging out costs is very high. Gupta has deliberately invested in the pre-existing funds and stocks in his portfolio to cut costs and stem losses. Subramanyam endorses this strategy as long as it is restricted to products that invest in a collection of stocks. "In the case of a single scrip, the risk of averaging is too high. Who knows which way the stock price will move? It may not reach the target price when you need the money for a goal," he explains.

In fact, according to Subramanyam, the youth should follow a goal-oriented distribution of investments, which is called tactical asset allocation. This means that for short-term goals, invest in debt instruments. For the rest, stick to equities, even if it shows up as a large slice of the portfolio pie. Such a strategy remains almost the same whether the markets go up or down. However, being young doesn't necessarily mean that you can stomach any degree of market roiling. If you have many dependents or are excessively in debt, don't be shy of holding a higher proportion of fixedincome instruments than your peers.

The only rule of thumb is: don't get out of equities completely. The slowdown is touted as a good time to invest in real estate. The correction in property prices is tempting, but the youth should be extra careful. This is the age of constant change. If already married, you may decide to have a child; if unmarried, you may tie the knot or take a study break, even take up a job in a new city. So your EMI calculations must factor in the impact of these changes on your budget. Besides, always follow the basics. Ensure that you are diversified across asset classes and monitor your investments regularly.

Vivek Jain

Case Study

Vivek Jain
Age: 31
Profession: Senior business analyst
Place: Pune

Combat strategy:

  1. Has moved out of sector funds and re-invested in largecap funds as they are relatively less risky.
  2. Will increase investment in debt to change equity-todebt ratio from 70:30 to 60:40.

"I am diverting a part of my investments to build an emergency corpus for about six months. I will continue to invest in equities, but in safer stocks."

Samir Pathak

Samir Pathak
Age: 32
Profession: Zonal manager, business development
Place: Delhi

Combat strategy:

  1. Plans to start a recurring deposit of Rs 15,000 a month to increase debt cushion of his portfolio.
  2. Will use the accumulated corpus in over a year to prepay some of his loans and reduce EMIs by 50%.
  3. "Though it is an illiquid asset, I believe real estate pays rich dividends in the long run. So despite the slowdown, my first priority is to repay my loans."

"Though it is an illiquid asset, I believe real estate pays rich dividends in the long run. So despite the slowdown, my first priority is to repay my loans."

The Emergency Fund Size
Expense break-up based on the monthly outgo of Prasun Bhowmik, 24, consultant in an accounting firm.
Home loan EMI/Rent: Rs 8,000
Groceries+Utility bills+Household help: Rs 7,000
Transport: Rs 3,000
Entertainment: Rs 4,000
Investments: Rs 10,000
Total: Rs 32,000
 
Cut-back During Emergency
Transport+Groceries: Rs 3,500
Investments: Rs 10,000
Total: Rs 13,500
Net expense: Rs 18,500
Emergency fund for six months: Rs 18,500 x 6
Total: Rs 1.11 lakh
 
How To Build It:
The fully liquid component: Required within one-two days. Can be parked in a savings account.
The partially liquid component: Required within a week. Can be invested in a sweep-in account.
The least liquid component: Required over a long period. All non-equity investments for the long-term qualify.

More Value for Less Money

They'll work more, save more, take risks or play safe, but most of the 30-somethings are unwilling to compromise on lifestyle. Unfortunately, in times as these, it's a must-do. Wriggling out of it might seem very difficult, but you can learn how to do so from youngsters like Samir Pathak.

A strained budget threatened the overseas vacation that Pathak, a 32-year-old zonal manager, and his wife had been planning for a long time. He hasn't cancelled the trip, but neither is he following the original plan. Pathak has changed the destination to Goa and is travelling by train instead of air. "I am still taking a break in a great place. By cutting back on transport, I will have additional money to enjoy the trip to the fullest. There shall be no compromises once I am in Goa," he says.

Spend, but wisely. This is the new mantra of smart young professionals such as Delhi-based Shruti and Debashish Roy. The couple's monthly expenses are about 52% of their income. Another 25.6% is skimmed off by EMIs.

To squeeze out more money for equity investments and loosen up a taut cash flow, they are moving to a house whose rent is lesser by about Rs 7,000. In addition, they have put on hold the plan to buy a new SUV. "Other expenses continue as usual and they are not going to hurt us in any way," says Shruti.

Budgeting does not require you to cross out items from the list. Identify what you cannot give up and concentrate on the discretionary expenses. If you are a spending addict, try the tip by Himanshu Kohli, founder partner, Client Associates: spend what you do not save instead of saving what you do not spend.

The calculation of your emergency fund is also based on sound budgeting. Once you know the discretionary component of your expenditure, you can build a realistic emergency corpus. Be careful when you estimate the cut-backs for a longer period, say six months, as sustaining a no-frills lifestyle may be exceeding difficult. Work hard now and add more to your emergency stockpile.

Credit cards is one of the most expensive, and yet, one of the most popular sources of debt among the 30-something crowd. For those snipping away expenses, keep plastic out of reach, except when it is imperative to pay by card. You will be able to keep track of your expenses better and will not be in for a nasty shock when the credit card bill arrives.

The glitch in all budgeting plans is the EMIs because you cannot voluntarily cut them to size. Partly prepaying the loan is a good option, especially if you withdraw money from the debt investments that earn a lower interest than the loan rate. This move reduces your loan tenure. You can also request the bank to reduce the EMI if your cash flow is tight.

You can even consolidate different loans, including those from different banks, by opting for a single loan against property. Mortgaging an asset increases your leveraging capacity. Typically, this loan has a lower rate than personal loans or credit card loans, and has a longer tenure, but do not take it for granted. Check the penalty for foreclosing the loans and the entry cost of replacement. Make sure that when the EMI is reduced, the loan tenure is not extended beyond your comfort zone.

Himanshu Pathak

Case Study

Himanshu Pathak
Age: 29
Profession: Manager in a real estate KPO
Place: Chennai

Combat strategy:

  1. When home loan rates increased from 7.4% to approximately 10%, he increased the EMI to reduce the loan tenure from 22 to 10 years.
  2. Will invest more in debt as he feels the current equity-to-debt ratio of 75:25 is too risky.

"I had assumed that my salary would increase by 15% in the next four years. I have reduced my expectations to 8% and re-worked my plans."

Realistic Expectations

This year, the confetti is missing from college farewells. Instead, the graduating batch is warily eyeing the job market. Vivek Madhukar, V-P of timesjobs.com, gives numbers that officials in various colleges refuse to reveal: "Jobs for freshers have dropped by about 40% across all industries."

Staying at home is not a solution that youngsters are considering. They are adamant about getting an entry in the corporate world. Madhukar lists out three alternatives to a regular job. The first is assisted entrepreneurship. As the salary packages shrink, freshers are signing up with start-ups for the unique experience of building a company on scarce resources.

Rohan Gupta, co-founder and COO of Attero Recycling, an ewaste management start-up, says that the company is getting several applications from top B-school graduates. "We are being picky as we don't want to be a stop-gap solution for freshers. They should know what they can contribute to the business and what they expect from the experience," he says.

Internship is a good option for those who do not have a pressing need to earn money. You may get a stipend, but this will be barely enough to cover the cost of working. The advantage is that when the economy looks up, there is a strong chance that you will be hired by the same company if your performance has been good. Or, you may be among the first to know about openings as you build a strong network.

What the majority of youngsters are vying for is project-based or commission-based employment. As companies cut costs, they are outsourcing work to freelancers rather than keep more people on their payrolls. Chinmay Upadhyay, 27, was working for a software firm when he quit the job in 2008 to freelance. "I am earning more than I did when I had a job. As the downturn intensifies, the number of projects coming my way has increased," he says. This is not a short-term solution for him. "Instead of being a bucket carrier, I want to be a pipe builder. In another five years, my contacts will help me build my own Web-hosting company," he adds.

You will most likely have to compromise on income no matter which option you choose. Many freshers are hesitant because if the base on which future increments will be calculated is low, they may suffer even when the economy rebounds. "They shouldn't compare their salaries with the seniors. The comparison is between low salaries and no jobs," says Madhukar.

A big problem with low salaries is the burden of an education loan. What if you can't pay the EMI? An official with SBI, which has the lion's share, 24%, of the education loan business, promises leniency in dealing with the students who haven't bagged a good salary. However, a visit to the banks throws up riders to this promise. The extension of the moratorium period is subject to a maximum of one year after the student completes the course.

In case he is still unable to secure a job, the bank asks the co-borrowers (mandatory for loans above Rs 4 lakh) to pay the EMI. You can negotiate for a lower EMI, but the bank may not agree if the proportionate increase in the loan tenure exceeds seven years. All concessions are contingent to your relationship with the bank, past credit record and the market scenario. Try your luck, but don't be very optimistic.

Aman Dhingra

Case Study

Aman Dhingra
Age: 28
Place: Chennai
Education loan: $115,000
Estimated disposable income after job: $2000 a month
Current corpus: $16,000

Suggested strategy: Use the entire current corpus to prepay part of the loan. Given the uncertain job market, focus on repaying the loan first. Build an emergency corpus of about $8000 and then use monthly surplus to reduce debt.

Navita Gandhi

Navita Gandhi
Age: 26
Place: Delhi
Retrenched in: December 2009

Combat strategy:

Joined an IT project with a Web-hosting company.

Advantages:

  1. Makes valuable professional contacts.
  2. Works from home at flexible hours.
  3. Earns 100% more than the last job.

Disadvantages:

  1. Will have to look for a new job after the project is complete.
  2. May have to work outside her domain of expertise till she finds a regular job.

"Doing project-based work is better than sitting at home and doing nothing. While I look for a regular job, my work experience is being enhanced."