Big Story | Covid-19 cash crunch? A guide to tap into your savings

Covid-19 has thrown personal finances out of gear for many. Pay cuts and job losses have become common, urging you to find new ways to make ends meet.

And, the worst thing is that no one knows how long this situation will last.

Yes, the government, on its part, has been trying to make it easy for us by allowing withdrawals from the Employees’ Provident Fund (EPF) to a certain extent. But, tapping into retirement savings upfront may not be a great idea, if you have a choice.

The fact that you do not have to pay your tax dues, if any, by July 31 is some relief. But other options such as loan moratorium, reduced EPF contributions or the reprieve to postpone tax-saving investments for 2019-20, too, don’t help much, as they are available only for a very limited time and have a downside as well.

Personal loans (including special Covid-19 loans) and credit-card loans are a bad idea. You wouldn’t want an added EMI burden when facing a monetary squeeze and an uncertain future, would you?

Considering the limiting factors, how do you survive these tough times while trying to tide over your cash crunch? Here is a guide to tapping into your savings. We have suggested a pecking order, taking into account the ease of liquidating the investment, the ease with which you can build back the corpus and the risk proposition involved in the instrument.

Sweep deposits, liquid funds first

Never before has the importance of holding emergency funds come to light in such a big way. It is usually recommended to hold estimated expenses of at least six months in investments which can be milked without fuss. The humble savings bank account is one such avenue. If you were savvy and had swept out amounts above a certain threshold from your savings account into a linked fixed deposit/flexi FD/sweep deposit, you can use these funds now, thanks to the reverse-sweep facility.

This option works seamlessly, filling in whenever your account balance falls short during execution of a transaction. Since what is reversed is only the amount close to what your need at that point in time, the rest of the sums parked in the deposit will continue to earn the higher interest (than your savings account) that the deposit is entitled to. Reverse sweep does not require any paperwork or visiting the bank branch — a boon in such times where we need to stay home.

If you hold money in liquid mutual funds, you can tap these, too, before you think of any other option. Though liquid funds do carry credit risk like any other debt fund, they are considered a good option for emergency savings, as they invest in instruments with a residual maturity of up to only 91 days and see relatively less volatility in their NAVs.

Their instant redemption facility is an attraction when it comes to ease of liquidation.

Amounts of up to ₹50,000 or 90 per cent of the folio value , whichever is lower (limits applicable per day, per investor, per scheme), can be redeemed within a matter of minutes through the instant redemption/access facility (provided you place your request before the cut-off time). If you want to withdraw more, you can go through the normal redemption process, which takes one or two working days.

Risky deposits next

You have exhausted your emergency options or, unfortunately, don’t have one at all. What do you do? The top-of-mind recall would probably be bank deposits. Thanks to the economic slowdown even before Covid-19 set in, loan growth for banks had taken a back seat and they were in no hurry to raise fresh money in the form of deposits. Repo rates have also fallen by 210 basis points since August 2018.

Due to these reasons, returns on bank deposits have taken a beating in the past 1-2 years. Many finance companies, on the other hand, have been wooing depositors with higher rates on their deposits and NCDs (non-convertible debentures), thanks to their need for funding. Following the IL&FS crisis in mid-2018, access to funding has certainly been difficult for them.

Thus, if you have invested in bank FDs in the last 1-2 years, you may be tempted to break them, while trying to hold on to those from non-banks that fetch high returns. But in today’s scenario, it would be more prudent to give up on risky FDs you may have invested with corporates or finance companies (NBFCs, HFCs), especially the ones with lower credit ratings. Notwithstanding the stimulus measures — such as providing liquidity with full/partial government guarantee for these companies — the lockdown and the economic slump following the Covid-19 outbreak may stretch their finances, making your investments susceptible. The full impact will be known only a few months down the line. An increase in bad loans among finance companies and liquidity/solvency issues are key risks.

Fresh in our memory is Dewan Housing Finance (DHFL), which raised money from the public through deposits and NCDs that were also meted out top-notch credit ratings at the time of issue.

With the company becoming bankrupt and under administration now, retail investors in both FDs and NCDs are facing an uncertain future, hoping for a resolution someday that could help them get their money back.

In case a company goes bust, FD holders are treated as unsecured creditors and are among the last ones in the order of preference for repayments. NCD holders may be secured or unsecured creditors depending on the terms of issue. Unsecured ones usually offer relatively high interest rates to make up for the higher risk. However, even for secured ones, the repayment process may be long-drawn and uncertain, as can be seen from the DHFL case.

Exiting risky FDs should not be difficult. Most have a lock-in period of about three months, post which you can close the FD prematurely. Yes, you will have to give up the whole or some portion of the interest earned as penalty when closing early, but it may be a small price to pay for avoiding losing your capital in future. Exiting risky NCDs is easier said than done. They are typically listed in the stock market (post a lock-in period) and if you hold it in the demat form, you can use the window to exit. The secondary market for NCDs, though, is not liquid, and finding the right price may be tough.

Market investments to follow

If you were never swayed by high-yielding fixed-income options and have sworn only by debt mutual funds for returns superior to bank deposits, this will be a good time to review your investments here. Today, encashing debt funds is something you should do before you think of letting go of bank FDs, post office schemes, or withdrawing from your EPF.

Events over the past year or two have shown that debt funds are not immune to credit risk.

Payment defaults/downgrade of companies such as IL&FS, Altico Capital, Essel Group, Vodafone Idea had a bearing on mutual funds that had invested in papers of these companies.

Eventually, many mutual funds have had to write down the value of these bonds, impacting the returns for investors.

Given the current economic situation, worries run high that some companies in whose papers mutual funds have invested in may not be able to honour their payment obligations — more so the ones with lower credit ratings. The winding down of a few debt funds of Franklin Templeton due to redemption pressures on these grounds is an example. Investors in these funds now cannot withdraw their money and will have to wait for the payouts, as and when the fund house makes them.

While the stimulus package announced by the government might ease nerves a bit, the future is uncertain as the Covid-19-led crisis is still unfolding. If capital preservation is your priority since you are running short on your salary income, now is the time to stop SIPs (systematic investment plans) as well as exit your debt fund investments if you can’t handle the associated risk. Investments can be redeemed any time unless you have invested in close-ended funds such as Fixed Maturity Plans (FMPs). They are settled within a few days’ time; exit load may be applicable, though, for redemptions within a certain time period.

If you have equity market investments, you need not exit in a hurry — unless you don’t have any other savings and can’t risk losing your shirt.

If you are a direct investor in equities or have exposure to equity mutual funds and are seeing losses in your portfolio now, it is better to hold on and book profits in stages.

You can stop SIPs temporarily to conserve some cash or partially encash any old investments that are in the green, to tide over difficult times.

Gold has had a good run since mid-2019, appreciating nearly 50 per cent in rupee terms in the past year. Selling investments in gold exchange-traded funds (ETFs) on which you may have made good profits on, is a more sensible idea. If you have subscribed to sovereign gold bonds (SGBs) in earlier tranches, you could be sitting on neat profits. But like NCDs, they score low on ease of liquidating. SGBs are listed in the secondary market, but exiting can be an issue, given the thin liquidity.

Bank deposits, if it comes to it

Only when you have exhausted the above choices should you turn to your bank deposits.

What works in favour of bank deposits is the deposit insurance cover of ₹5 lakh. This cover is applicable per bank. So all deposits — savings, current, FD, RD — across branches in one bank will be covered by insurance of up to ₹5 lakh for principal and interest. Apart from public and private banks, deposit insurance is applicable to cooperative banks (barring primary agricultural credit societies) and even small finance banks.

If you have been investing in deposits of cooperative banks because they offer higher returns, check them out of your portfolio first as they entail higher risk. This is because of their lending to otherwise unbanked/vulnerable sections. While the RBI regulates the banking activities of cooperative banks (barring primary agricultural credit societies), these entities have time and again failed, thanks to lacunae in governance. PMC Bank and CKP Co-op Bank are recent examples.

Breaking small finance bank, private and public sector bank deposits can follow, if necessary. Despite the surging NPAs (non-performing assets), periodic capital infusions and mergers are seeing public sector banks through difficult times.

For private banks, as can be seen from the YES Bank case, the RBI and the government have acted to keep the bank afloat as of now.

However, to not lose your sleep over what is considered ‘safe’, keep tabs on various parameters of banks such as capital adequacy ratio, NPAs and liquidity coverage ratio, in the next few months to see which bank could be vulnerable.

This information is publicly available. Exiting bank deposits is not difficult. If you had opened it online, you can close it online as well.

Even for offline deposits, a few banks allow online closure through net banking. Else, visiting the branch with your FD receipt may be required. Most have a lock-in of 3-6 months, beyond which you can opt for premature closure. As is the case with non-bank deposits, most bank deposits, too, require you to sacrifice some portion of the interest on pre-closure.

However, if you are locked into a five-year tax-saving deposit, you will not be able to break it. Also, keep in mind that though banks may lure you with loan against FD, it is always better to not take on additional interest payment burden when you finances are shaky.

Small savings as a last choice

With the sovereign guarantee that they enjoy, small savings should be you ‘lender of last resort’. Despite being linked with government security yields since April 2016, the experience so far has been that returns on small savings schemes are not usually tinkered much, regularly.

For instance, though G-Sec yields have dropped steadily in the past year, leading to over a 100 basis point dip, it is only now in the April-June 2020 quarter that interest rates on various schemes were reduced by up to 1.4 percentage points from the immediately preceding quarter. Yet, many schemes open for all citizens such as NSC (National Savings Certificate), KVP (Kisan Vikas Patra) and PPF (Public Provident Fund) still remain attractive with 6.8 -7.1 per cent returns. This is because the Section 80C tax breaks available for NSC and PPF peg up the returns (if you choose to remain under the old tax regime).

If you must touch small savings schemes to tide over your financial needs, choose relatively short-term instruments such as FDs, RDs and KVP over schemes which supplement your regular income needs such as the post office MIS (monthly income scheme), or those in which you save for long-term goals, such as PPF.

Post office FDs allow premature closure after six months and RDs after three years. A haircut on interest may be applicable for early closure. You can encash KVP after 2.5 years. The government lays down the amount payable including interest for tenures beginning 2.5 years till its maturity. You will be paid according to your holding period.

There is no early closure option for the NSC, barring exceptional circumstances such as death or a court order. Loans against certain post office schemes including NSC can be taken, but don’t add to your burden.

PF best left untouched

The Employees’ Provident Fund Organisation (EPFO), which has 4.8 crore active subscribers, has seen more than 11 lakh employees withdrawing around ₹3,500 crore under the special Covid-19 advance facility till date.

Under the PM Garib Kalyanpackage announced in end-March, employees who are members of the EPFO can withdraw 75 per cent of the amount standing to their credit, or three months of wages (basic pay and dearness allowance), whichever is lower. The process is easy and entirely doable online with a matter of a few minutes if your UAN is linked with your Aadhaar, bank account details and mobile number. The claims are settled in three days.

While the ease of withdrawal may tempt you to milk your EPF sums over other savings, it is best avoided.

Touching your retirement kitty is a strict no-no. For one, there are very few options for long-term savings that provide tax benefits, are risk-free and also give assured returns.

EPF investments of up to ₹1.5 lakh enjoy tax benefits under Section 80C (if you choose the old regime), and the interest and maturity amount are tax-free.

Though the EPFO invests certain sums in the stock market, it pays a declared interest rate every year.

And, being run by the government, you can rest assured that your money is safe. Second, when you withdraw money from these vehicles, it is not easy to replenish, as it is a defined contribution scheme. The Covid-19 advance from the EPF is non-refundable, implying that your kitty is dented to the extent you withdraw.

While you do get the tax benefits on the initial investment under the NPS (National Pension System) and the entire 100 per cent corpus on maturity is tax-free, you need to invest 40 per cent of that corpus compulsorily in an annuity product.

Your returns in NPS are dependent on your risk-taking ability and the combination of investments you choose to do.

Yet, unlike the EPF, the NPS has a window for partial withdrawal only for Covid-19 treatment — in case you, spouse, children or dependent parents are affected by the virus.

This is to prevent subscribers from withdrawing to just tide over temporary cash flow troubles.

Don’t dip into PPF

The PPF allows partial withdrawal after expiry of five years from the end of the year in which the account was opened, without end-use restrictions.

But, for the same reasons as the EPF, you should also not touch your PPF.

Though it is a relatively short-term product with a 15-year tenure, it can be extended in blocks of five years to suit your long-term goals.

PPF is entirely risk-free, gives tax benefits at all three levels — initial investment (if you choose the old regime), interest and maturity — and also earns decent returns.

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