In times of rising interest cost and prices, falling cash balances are a common feature. There are times when one finds oneself in a situation where raising cash becomes a serious problem. At such times, some people go the whole hog and break their fixed deposit, withdraw from provident fund, exit from existing mutual funds and even go for a personal loan. These are methods that are quick-fix solutions that provide immediate liquidity, but they hurt your finances in the long run.
Holding on to your investments, as far as possible, will help in ensuring that you provide for extreme situations. Also, going for a personal loan will mean paying interest at 18-20 per cent a year - something that may provide immediate relief, but hits your bank balance in the months and years to come. In dire need, if you want to make use of the investment portfolio, here's how to do it to ensure lower interest payout. Besides, it does not erode the value of your asset completely.
Property: If you have a second property, don't put it on the block. Instead, if you are earning rent on it, borrow against rent receivables. Banks give a lump-sum loan to the extent of 80 per cent of the rent amount. This arrangement can be continued for 1-3 years. And it's still your house.
Salary: If it is a short-term need, just for a month, approach the bank where salary gets deposited every month. Banks usually grant you an overdraft of the entire one month's pay. Of course, that implies that the next month they would recover the entire sum and the interest charged is high. But the advantage is that it solves you immediate cash needs.
Fixed deposits: If you have a fixed deposit with a bank, utilise the option of taking an overdraft against it and do not break it. The overdraft facility allows you to get 80-85 per cent of the deposit amount and the interest charged will be only on that amount. That is, if you have Rs 50,000 in a fixed deposit and you withdraw Rs 20,000 as an overdraft, you would have to pay interest only on Rs 20,000. The good news is that the fixed deposit will continue to earn interest, albeit a lower one on the remaining balance.
Insurance: Another method of raising cash is through borrowing against the insurance policy. Once the insurance policy reaches a surrender value, usually after three years with private insurers and five years with Life Insurance Corporation of India, you can borrow up to 85 per cent of the surrender value from the insurance company. The interest rate charged is as low as 10-11 per cent. Better still, you can take time to repay the loan.
In case of a simple LIC policy, there is no repayment hassle either. If you are unable to repay, the balance can be deducted, when the policy matures. But you need to be punctual in paying the half-yearly interest amount. You can also take a loan on policy to pay premiums and invest the rest in better-paying schemes like gold exchange-traded funds.
Provident fund: Do not fold up the provident fund, at any cost. Take a loan against it, if you have held it for over 3-6 years and repay the amount in a long duration of three years. The sum sanctioned is 25 per cent of the balance standing to your account at end of the first year. The best part is the interest to be paid is just 1 per cent a year! Delay is no problem, as the interest goes only up to 6 per cent.
In case there is a cash crunch, another way to keep the provident fund going is by withdrawing the amount in the eighth year and reinvesting the same for the remaining 7 years. Thus you can escape making fresh contributions for all those years. The provident fund remains the most important asset because even if all assets are liquidated, it can't be attached, even through a court decree.
Small savings: As it's easy to invest in small savings, enter schemes with proper planning. For instance, invest in National Savings Certificate and Kisan Vikas Patra every month for 6 years and reinvest maturity amounts. You can earn a monthly sum, as they keep on maturing. What happens is that the same maturity amount keeps on getting invested. In this way, your funds are not under any pressure on a monthly basis.
Another way is to invest in Post Office Monthly Income Scheme and Senior Citizens' Savings Scheme every month and transfer interest to a recurring deposit, as both schemes give a 10.5 per cent return.
And now a few do nots. Pensioners should, by no means, take an overdraft against their pension money, as the repayment duration is just 2-3 months. The penalty is stiff, also touching a hefty 2 per cent a month. Also, it is not too smart to take a loan against gold. The cost works out to more than interest you can earn on gold investment.
Be active, while investing, but don't be anxious to withdraw. A sale of any asset can hurt. You need not sell your car too, as you can get an overdraft against the car from Rs 50,000 to Rs 700,000, if required. It is more important that you unlock the wealth of your assets, rather than sell them.
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