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Legendary money manager Howard Marks often recounts a story. When he returned home after the 9/11 collapse of the World Trade Centre in New York, his son asked him if the world was less safe than before. Marks replied that perhaps it was less safe than everyone had thought it was. Marks' words of wisdom are worth pondering over today. The yo-yo years of the recent past have modified several assumptions.


Global investors are reassessing emerging markets and taking the view that China, India, Brazil and Russia hold risks that were unaccounted for earlier. Indian investors find that equity does not deliver in 2-3 years, but in 7-10 years, or more. Market cycles are swinging from one extreme to another, but the unravelling is always filled with surprises—pleasant ones at the top, and nasty ones at the bottom. Let me offer six quality checks to ensure that your ship is in order while you wait for the
storm to pass.


First, get real about your job and income. If you have been lucky to move your income up dramatically by switching jobs, negotiating smartly and taking risks, reassess it honestly. If businesses are unable to turn around, they are likely to downsize, or in the worst case, shut down. Get ready to take a salary cut, a reduction in revenue, or a lower demand for your professional services. Review that break or sabbatical. Find a way to monetise your skills. Recheck the foundations of your wealth to be sure that the income stream is not drying up.


Second, insurance is not a bad word. If you have been mis-sold Ulips and had a bad run-in with insurance that you bought only to save tax, you may be shunning a product that holds merit during bad times. Without the protection of insurance, your limited wealth may be lost in hospital bills, repairs and restoration, unexpected thefts and damages, and avoidable erosion. Seek out protection that is well-defined, reasonably priced and adequate to cover you and your family.


Third, repay debt and avoid leverage. A combination of high EMIs and risky jobs has taken a heavy toll on the happiness of several young couples. To borrow is to use tomorrow's income today. When income seems to be at risk, keep the charges on it to the minimum. Re view your loans. Is repayment stressing your finances? Can the upgrade for the car wait? Is there a point in keeping deposits at 8%, while loans at 12% are piling up? Should the maturing bond be used to repay a loan? A business faced with risks of revenue always reworks its assets and borrowings. What is not needed is sold off, and leverage is re duced on the balance sheet, so that the loss of revenue does not lead to insol vency of the business. A good quality household balance sheet will similarly have to balance out the borrowings and income.


Fourth, realign your assets to your needs. If your portfolio is primarily made up of your luxurious home, shares and derivatives, you need to rework the mix. A part of your wealth should be amenable to being drawn down in instal ments to help manage the loss of income or generate adequate income to augment your needs. You will need assets that are liquid, flexible, and less volatile. If your optimism for equity led to overweighing it in your portfolio at the cost of debt rebalance it. If you invested in a holiday villa and now your job is at risk, you need a rethink. It is more important to ask which asset will work for you, in stead of asking which asset is going to do well in the future. If your children are likely to draw the money soon for higher education, you may not want to keep the corpus in equity, hoping for the next bull run.


Fifth, risk is what you can bear, not what the market offers. The simplest definition of risk appetite in investing is about the downside you can suffer This is both about ability, in terms of the wealth that you have, and willing ness, in terms of your attitude to losses Sachin Tendulkar and Shah Rukh Khan should also be factoring in risks to their future incomes. Their accumulated wealth will give them the ability to take risks with their money, but their invest ments should also have a defined down side, more so when they know their abil ity to replenish their wealth would be lower in the future than in the past. En sure that you have not taken bets that will cost you your coat.


Sixth, asset allocation always works Ignore the gurus and pandits who read the crystal ball. Discount all advice about what the future holds. Future is but an imagined set of events, and can therefore, be only about probabilities not certainties. Give up the eternal search for the next best investing oppor tunity, and stop asking what will work next. Ensure that your money is put to work across assets, and do not indulge in a risky asset beyond your personal capacity for risk. A core portfolio, com prising your home, gold, PPF and bank deposits, is your base. A wealth portfolio consisisting of shares, ESOPs, mutual funds and bonds, is the add-on facili tated by your healthy earning, good sav ings and sensible investment. Your speculative positions, right from that house you booked for fun, to the com modities you traded as pastime, is the froth. Protect the core, be sensible with the wealth, and cut out the froth. Your ship might yet sail home to safety, weath ering the storm. 

Happy Investing!!

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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

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  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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