Real Returns. When disaster strikes, cash is really king

When natural disasters strike, most of us imagine that these are one-off events that can happen only to others. But the torrential rains in Chennai, which saw people across economic strata suffer massive losses, call for a rethink in the way many of us plan our finances. Here are the financial planning lessons from some real-life experiences in Chennai (names have been changed).

As flood waters entered his ground floor flat in the early hours of December 3, Paul Samuel, a resident of Velachery, had just enough time to collect his mobile phone, a few clothes and essential food items, as he and his family sought refuge in the first floor.

The water logging, which lasted two days, wreaked complete havoc on his household possessions — from TV, fridge and washing machine to furniture, mattresses and storage cabinets. He believes replacing these items will cost ₹1.5 to ₹2 lakh. With an annual CTC of ₹5-6 lakh, this will deal a body blow to his savings and set back his financial plans by three to four years.

Samuel’s case and others like his, underline the need for investors to buy protection for their existing assets before investing for future goals. Most standard financial plans include a term cover for one’s life, accident cover and health insurance. But few include either property insurance (to protect the building) or householders’ cover (which protects the contents of one’s home) from the Acts of God.

A cover of ₹20-25 lakh (covering both the building and contents of a home) can be bought for ₹4,000 to ₹5,000 a year. While taking the cover, it is best not to be picky about the kind of manmade or natural disaster you are protecting against (who knew Chennai was prone to floods!). Those in rented homes should look at householder policies to protect their belongings.

When Vijayaraghavan invested the bulk of his retirement benefits to buy six new apartments at the upcoming Pallikaranai last year, he was convinced that he would earn hefty rental income. But he now wishes he could reverse his decision. “I am now worried that rents and property prices in this locality will drop sharply. Even if I try to sell some property, will I find buyers?”

One lesson learnt is to diversify your property investments just as you would your financial investments, across cities and geographic regions.

Two, many savers think that hard assets that they can see and feel are more useful in a dire situation than financial assets. But the Chennai floods have turned that belief on its head. Investors who have a lot of their wealth in assets like property or jewellery have suffered reverses, while those who held financial assets (especially in electronic or demat form), are better off.

When disaster strikes, one’s concern for life and limb is greater than that for jewellery or property. Financial assets such as mutual funds, shares or even sovereign gold bonds, aren’t location-specific and preserve their value during disasters.

A third lesson learnt is that liquidity deserves as much attention as returns and safety, in portfolio construction.

Even if you don’t foresee the need for money, parking 40-50 per cent of your wealth in assets that offer ready liquidity should be a priority. For those who had stored away jewellery, hard cash or documents in bank lockers, there was additional anxiety after the floods.

“Our bank manager called and asked us to visit our locker to verify its contents. The lockers were in the basement which was flooded and the bank does not insure the contents,” says a worried home-maker.

Most people don’t realise this, but banks only rent you storage space in the locker and don’t offer to protect its actual contents. One learning here would be to be to look for locker facilities not located in basements. But an even better alternative would be to take out insurance cover for the contents of your bank locker.

Do be sure to scan and maintain digital copies of all your land and property documents, Will, Aadhar card, passport and certificates. Buy space on cloud-based applications or use e-locker facilities offered by banks to store this electronic ‘wealth’.

Most financial planners ask investors to maintain an emergency fund equal to six months/one year living expenses in bank deposits or liquid funds.

But such an emergency fund would have been of very little use to Chennaiites during the floods.

Most ATMs were either inaccessible or non-operational during the worst of the rains. With disruption in connectivity, most kirana stores, fuel stations and pharmacies stopped accepting credit or debit cards. Therefore, if you needed emergency supplies or medicines, you had to pay in cash — that too without relying on your friendly neighbourhood ATM.

Cash was the constraint if you were keen to help out in relief work too. The ‘no plastic’ situation meant shelling out cash to buy blankets or clothes in bulk. Clearly, when it comes down to the wire, India is still a cash economy. So, hold at least one month’s living expenses in hard cash, with a buffer to help out your household staff in the case of emergency. Is it safe? Well, insure the cash balance too!