Below are six easy steps on how to go about planning your financial goals.
1. List Them
Often, when asked to list their financial goals, people think that only the big things matter – buying a home, earning a master’s degree for their kids, their own retirement, etc. But such lofty goals certainly should not be abandoned. The little things in your financial plans also matter. If you are planning to upgrade your laptop or two wheeler in a year’s time or plan to buy your parents home theater, then these goals also need financing and should be on your list. Should be. Incorporating small goals into your plans ensures that you can save for them further instead of having to resort to EMIs to meet them.
When setting your goals, liabilities must be got rid of before assets can be acquired. There would be no point in starting a SIP for your daughter’s degree when you are exaggerating your credit card limit and paying hefty interest rates. So, list your liabilities and pay them a part of your financial goal setting.
For us Indians, a lot of our financial goals revolve around our family and dependents. So, be sure to consult your family while setting your goals. It wouldn’t make sense for your son to invest in an Ivy League STEM degree if his life dream is to become a lawyer or theater artist. If your spouse is not with the idea then you can say goodbye to early retirement. Consider the amount needed to support your parents and other dependent family members when setting goals.
2. Prioritize Them
Financial goal-setting for any family can quickly become unmanageable if you let wishful thinking compete with reasonable aspirations. When listing family goals, categorize them into needs, wants, and luxuries. The difference will depend on your financial situation and life situation. For a middle-income family, an annual vacation may be a necessity, but traveling to Europe can be a luxury. Securing a seat in a high-end engineering college in India may be a necessity but the desire to get an Ivy League degree can be a luxury. If some necessities or luxuries seem out of reach, start early for more modest necessities and use any additional returns you make in future years to ‘upgrade’ the goal. If you suddenly get a performance bonus at work, you can use it to upgrade your family vacation from an Indian holiday to an overseas vacation. There may be unexpected gains from a relative to upgrade your son’s education amount.
3. Protect Yourself and Your Family
Sudden acts of God or misfortunes that befall you and your family can quickly derail your carefully laid plans. Hence, getting a life insurance, health cover and accident cover for the breadwinners of your family is an essential first step that should be done before any other investment. It would also be a good idea to have home insurance with a floater policy and to secure your home and belongings against natural calamities with ill health to your family members. Despite these precautions, life is bound to impose some googling on you. This requires an emergency or contingency fund that is liquid and absolutely safe to invest. While 6-9 months of living expenses are the typical recommendation for this emergency fund size, the fund will need to be increased if you have dependents or work in a sector or firm with low job security. It won’t make the misfortunes less painful, but dealing with it will lessen their financial impact and help you get back in the direction of your goals faster.
4. Specify the time horizon
Once you have a list of goals, map out exactly when you want to achieve them. This is essential because the type of portfolio and asset allocation you will use to achieve the goal will depend on its target date. Some goals have an exact target date, such as your daughter’s education fund that needs to be ready when she turns 18. Some are flexible – like planning to take a break from work or upgrading from a car to an SUV. The nature of your target’s target date has an impact on the investment path you use to protect it.
5. Create Separate Portfolio
Once you have aligned your financial goals with their time horizons, enlist the help of a financial advisor to create separate portfolios for each goal. Goal-based portfolios also help you have separate asset allocations for each portfolio. Therefore, targets less than 5 years may have a purely debt-oriented portfolio, targets for 5 to 7 years may have equity-debt balance and goals over 7 years may have high equity allocation. Having separate portfolios for each goal also makes it easier for you to monitor and review their performance.
6. Review and Revisit
While it is important for your financial plans to have well-defined goals in order to work, recognize that these goals cannot be cast in stone. For most people, goals and aspirations vary depending on one’s age, life stage, and circumstances.
Your daughter, who swore she wanted to be a teacher in her elementary school, may change her mind by the age of ten and establish her vision to become a microbiologist. The 4BHK bungalow you were hoping to own might seem like too much of a hassle by the time you reach your fifties.
That’s why, while it makes sense to get an early start on your financial goal-setting (ideally, you should start the process soon after getting your first job), be flexible about these goals, too. Absolutely essential when you work on their side.
Reviewing and reviewing your financial goals every year can help you adapt to changing circumstances. There are three aspects to the process. One, at least once a year, sit down with your family and review the goals you’ve set to see if you need to add new ones or discard old ones. Two, review each goal-based portfolio’s performance against its targets and make adjustments to asset allocation or investment amounts if you’re falling short. Take stock of changes in your income level to see if you can increase your savings and investments to meet important goals.
Lastly, and most importantly, remember that just as the starting point of your investment makes a huge difference in achieving your goals, the end-point also matters. For targets that are within three years of their target date, it is imperative to initiate a phased shift in asset allocation away from risky and volatile assets such as equities, to safer capital-protected assets such as debt.
As the poet Robert Burns said in his speech to a rat – “The best plans of rats and men often fail”. Many beautifully crafted financial plans for college degrees or retirement have collapsed in the stock market at the last minute, leaving a healthy corpus. Planning a strategic exit from goal-based planning, when underway, can save you from such misfortunes.
When and how is tax charged on SIP
There is no tax implication at the time of making investment nor are you liable to pay any tax in respect of increase in NAV of units received at the end of a financial year. Liability to pay tax arises only when you sell the units through the stock exchange or redeem them from the fund house. For taxation purposes, each SIP transaction is treated as a separate investment and profits are calculated at the time of sale/redemption based on FIFO (First In, First Out) method. Under the FIFO method, the units purchased first are deemed to have been redeemed or sold first. In case you have more than one demat account where your mutual fund units are parked, then this method of identifying the units sold is applicable for each demat account separately.
tax liability compilation
The tax liability on profit on sale/redemption depends on the period for which you were holding the units. In case of equity oriented schemes, if the investment is held for less than 12 months on the date of sale/redemption, they are treated as short-term capital gains (STCG), otherwise they are treated as long-term capital gains (LTCG) for taxation goes. purpose. While computing profit on units purchased under SIP, profit/loss is calculated with respect to each lot of units purchased through that particular SIP. The difference between the total cost of units sold and the sale/redemption value of units included in each SIP investment is treated as capital gain.
Unlike other long term capital assets, no indexation benefit is available in respect of LTCG on Equity schemes. For units received through SIP before January 31, 2018, NAV as on January 31, 2018 is taken as cost for units sold/ redeemed after 12 months. Therefore, any increase in the NAV of the scheme is effectively left to you till January 31, 2018. However, if the actual cost of SIP purchase exceeds the NAV as on January 31, 2018, plus the sale/redemption price, the difference is treated as capital loss and is allowed to be set-off against other eligible capital gains. STCG on equity units is taxed at the same rate of 15%. There is no tax liability for equity investment in equity oriented schemes and initial one lakh LTCG on equity shares listed together.
LTCG above Rs 1 lakh is taxed at a uniform rate of 10%. Similarly, STCGs on units other than equity oriented schemes are added to your regular income and taxed at the slab rate applicable to you, but such LTCG is taxed at a flat rate of 20% after indexation . For listed securities other than units, you have the option to pay tax on LTCG at 10% without indexation or at 20% with indexation. If you are a resident individual for tax purposes and your total income excluding capital gains on equity plans is less than the basic exemption limit applicable to you, then your taxable capital gains will be reduced by the reduction in exemption limit and only such capital gains The balance amount will be taxed at the same rates.
This benefit is not available to non-resident taxpayers. Similarly, if you are a tax resident and your total taxable income including all types of capital gains does not exceed Rs 5 lakh in a year, you are entitled to a deduction of Rs 12,500/- under section 87A, which It can be adjusted against any of your taxability of any kind except tax payable on LTCG on equity products is taxed at 10% and you will still be taxed on LTCG on equity products at 10% over the initial one lakh on which no tax is payable.
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Author – Aarti Krishnan (Originally published in IPRU Insights)
Disclaimer
An investor education initiative.
meeting www.icicipruamc.com/note To know more about the process of fulfilling the Know Your Customer (KYC) requirement for investing in mutual funds. Investors should deal only with registered mutual funds, details of which can be verified on SEBI website http://www.sebi.gov.in/intermediaries.html, For any queries, grievances and grievance redressal, investors may contact the AMC and/or Investor Relations Officers. In addition, investors can also file complaints on https://scores.gov.in If they are dissatisfied with the proposals made by the AMC. The SCORES portal allows you to register your complaint with SEBI online and view its status later.
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