It’s that time of the year again. Traditionally, most Indian households swing into action every Diwali to spring-clean their homes and hearths to welcome the goddess of wealth Lakshmi.

Just as our material possessions fill up our houses and take up all the available space and need to be disposed of, our finances can also get cluttered if we do not clean and sort them every now and then.

You may have an insurance policy that you do not need anymore, or a high-interest lingering loan that you may easily be able to pay off with your funds. Taking stock of your assets as well as liabilities at least once a year, if not more, will straighten up your finances and give a long-term view of your goals and needs.

Diwali can be a good time to make a start. “Cleaning up your finances is not a one-day activity. Productive de-cluttering is a process-oriented activity,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.

He suggests that an effective way to de-clutter one’s finances is to follow the “bucket approach”. You can start by creating and labelling buckets as “assets” and “liabilities”. Within “assets” and “liabilities”, you can have small buckets for separate assets and loans. Once you are done, analyse each bucket and consider the relevance and need of the products in it. “Such an analysis will give you a fair idea of performing and non-performing assets. Also, the liability bucket will give clarity on how the debt planning can be done effectively,” he adds.

Here are some of the buckets you may create and reassess.

Consolidate Your Loans

Loans have become an important part of modern-day lives that survive on EMIs. However, having too many loans means that you spend a big portion of your income to serve EMIs and do not have enough to save and spend.

To start with, make a list of all the different loans, including credit card debt, you have. One way of managing your debt is to apply the ‘debt avalanche method’ to eliminate the most expensive debt first. So, pay off high-cost debt like credit card dues and personal loans first. They, typically, carry a high rate of interest, and the sooner you pay them off the better.

Perhaps, you could use the Diwali bonus to pay off such loans instead of spending the money on goodies you won’t use.

Another reason to clear high-debt loans now is that with interest rates at an all-time low, using a low-interest loan to pay off all your dues may save  you some money. Take stock of your credit score and eligibility before taking this step.

However, some loans may be good for you in the long run. For instance, a home loan comes with a lower interest rate, helps you create an asset and give you tax benefits. While you can prepay your home loan as well, “the first thing to do is see if the high-cost loans can be retired,” says Suresh Sadagopan, managing director and CEO, Ladder7 Wealth Planners Pvt. Ltd, Investment Advisory Division, a Sebi-registered investment advisor.

Evaluate Your Insurance

Buying a life insurance policy every tax-saving season is par for the course for most: it’s sometimes the friendly neighbour-cum-agent, or the elders in our own families who swear by insurance policies and look at them as investment products. After a few years, there may be far too many policies in your portfolio.

The fact is that only those with dependants need to buy life insurance. “You need to understand the basic concept of insurance. It’s not an investment. The purpose of insurance is to ensure financial protection for the family in case of the breadwinner’s untimely death. The need to clean up your insurance portfolio comes up only when you had previously misunderstood the purpose of taking insurance,” says Sen.

If you find too many insurance policies, especially the traditional and endowment variants, in your portfolio, it’s time to get a reality check on how much cover they are providing you and how much you are paying for that cover.

One of Sen’s millennial clients has three endowment policies for which he pays annual premiums totalling `77,000 for a cover of around `45 lakh. A term cover, the cheapest and simplest form of insurance, would have cost him under `10,000 for roughly the same amount of sum assured.  

Financial planners advise that a life cover should be at least 10 times the annual salary. If the sums assured from your policies do not add up to a suitable amount, and you have dependants, you may need to take additional cover.

Unfortunately, getting rid of policies you may have accumulated till now may not be that simple as most of them come with surrender costs. It’s important to do a cost-benefit analysis when reassessing your insurance policies. Seek the help of a financial advisor if the calculations are too complicated for you.

“After proper calculations, if the purpose and maturity benefits of the existing insurance policies are not making sense, they’ll have to be removed from your insurance portfolio,” says Sen. If some of these are about to mature, it may make sense to continue them, he adds.

If you are starting with a clean slate and have dependants, buy adequate term insurance. Use the surplus to invest in mutual funds or other suitable avenues.

Streamline Your MF Portfolio

A lot of millennials now invest in mutual funds, thanks to growing awareness and the rising markets. But having too many mutual fund schemes isn’t a good idea either.

“Having too many schemes just bloats the portfolio without adding to the diversification. Having five-six schemes in a basic portfolio is usually fine. One can add a few more based on liquidity, short-term goal fulfilment needs and so on,” says Sadagopan.

While there is no thumb rule on how many mutual fund schemes you should buy, “it is best to have six-eight schemes each in equity and debt categories,” says Anup Bansal, chief investment officer, Scripbox, a digital wealth management service.

So how do you go about decluttering your MF portfolio? “The first and foremost step to declutter your portfolio is to set clear objectives, which includes understanding your financial goals, risk tolerance, suitable asset allocation and investment time horizon. Once you have the clarity on what you want, the product or scheme that is not aligned to your objectives should be redeemed,” says Bansal.

Further, scheme selection should ideally revolve around your specific financial commitments which you need to fulfil within stipulated time periods. Diversify across mutual fund categories like large-cap, mid-cap, small-cap, ultra-short, money market, and low duration funds, depending on your needs. For instance, for a short-term goal, stick with debt funds with high liquidity. Equity funds may be too volatile for a short-term goal.

If you are following a goal-based approach, the chances of your portfolio getting cluttered reduce.  “If one exhibits herd mentality and runs behind the ‘next hot sector’, the task of de-cluttering the investment portfolio will come back time and again. With time, the purpose of investments will break down,” says Sen.

Last but not the least, when cleaning up your house, take out all the investment-related documents and sort them. You can also opt to just keep the soft copies of the ones you still need to reduce clutter. Remember that less is more when it comes to managing your finances effectively.

meghna@outlookindia.com