It is wise to create or reassess your investment strategy at the start of every financial year. Read on to know why and how to do this.
It’s been a few days since we kick-started a new financial year. And it’s high time we plan our financial commitments for the year, don’t you think? While investment oldies need to revisit and reassess their investments, newbies should chart out an investment strategy.
Here are the major areas to focus on this financial year to gain better control over your finances:
Start with a budget
Budgeting may seem like a depressing task to many. But it is important if you’re trying to build your wealth. It is necessary to keep a track of your expenses if you want to save money. No, we’re not asking you to stop living your desired lifestyle. What we are suggesting is that you cut down on unnecessary expenditures.
Before you start planning your finances, it is important that you prepare a personal budget, monitor it frequently, and analyse it. Based on this, you’ll be able to allocate your savings in different investment options.
Prepare a plan
Before your rush to open a Fixed Deposit or invest in a Mutual Fund, you’ll need to have a financial plan that aims to meet your requirements. Making random investments aren’t good for your finances in the long run. Without a plan, you’ll be investing money without any goals attached to your investments. After all, you’re investing or saving money to realise your financial short-term or long-term goals, aren’t you?
Build an Emergency Fund
If you don’t want to dip in your investments when there is an emergency situation at hand, you better save separately for the rainy days. An Emergency/Contingency Fund shouldn’t be considered as savings intended to meet your financial goals. Instead, it is a safety net which would cover your expenses in case of any unforeseen circumstances.
When it comes to rainy day funds, the thumb rule is to save at least three to six months of living expenses. This would help you sail through difficult times with ease. Put a part of your Emergency Fund in a Savings Account and the remaining can be invested in a Liquid Fund.
Identify your financial goals
If you want to gain maximum benefit from your investable resources, then you will have to first set your long-term, short-term and immediate financial goals and then create a plan to achieve them. Setting your goals can also help you follow the ‘income minus savings equal expenditure’ approach rather than the widely-used ‘income minus expenditure equal savings’ approach.
Goal-setting is the first step towards realising your financial goals. It helps you to manage your money properly as well as to channel it in the right investment avenues. The first step in goal-setting involves assessing your current financial situation. You need to understand your earning potential and determine your saving potential in relation to that.
The next step in goal-setting involves identifying your goals – immediate, short-term and long-term. A time frame has to be attached to each of your goals. Only if the time frame is clear will be you be able to assign a specific investment option to each of your goals.
Finally, once you’re clear about your goals and their time horizons, you can pick your choice of investment product for each of them. You can always take the help of a certified financial planner if you aren’t sure of doing it yourself.
Wondering why you need a risk cover? Allow us to give you two reasons – it helps protect your financial dreams and your financial dependents. So, it is necessary that you get at least Health and Life Insurance before you throw your money into other investments.
Both Life and Health Insurance are easily available. Compare different options and pick that one that best suits your needs. When it comes to Life Insurance, make sure that you buy a cover that is equivalent to at least ten times your annual income. For example, if your annual package is Rs. 10 lakh, then you should get a cover of 1 crore.
Additional Reading: What It Costs To Buy A Rs. 1 Crore Life Insurance Cover
For small/young families, a family floater Health Insurance plan is perfect and will provide decent coverage.
The Investment Plan
Now that you’re sorted with your financial plan, you need to put your investment portfolio in order. Take a look at the different investment options available. Consider aspects such as liquidity, underlying asset class, and taxability. Once you’ve finalised on the investment options, link each of them to a specific goal of yours.
As a rule of thumb, long-term goals are usually linked with equity investments while the short-term goals are linked with debt funds.
Additional Reading: The Beginner’s Guide To Creating An Investment Portfolio
If you’ve already been investing, then the start of a financial year is the right time for you to revisit your portfolio. If there are any laggards in your portfolio, now might be the right time to replace these stocks with better performers who have delivered consistently.
Existing investors should also review their investment surplus. If you’ve had an increase in income, you may want to increase the amount you’re investing towards certain goals. At the same time, if you’re nearing the fulfilment of any of your goals and you’ve been investing in equities, it is time to switch to less risky options such as debt funds. Ideally, you should make this switch during the last three years to the goal.
The Tax Menace
Unless you want to give away a chunk of your hard-earned money as taxes every year, you’ll have to start planning your taxes early on. It is recommended that you start to plan your taxes at the onset of a financial year. How do you do it?
For starters, you need to estimate your tax liability for the financial year. The estimate should consider your total taxable income from all sources. Once you know how much tax you are liable to pay, you can plan your tax saving investments (investing under section 80C).
Additional Reading: Tax-Saving Investments to Grow Your Wealth
Also, if you’re looking to save taxes while saving for your future, you can increase your Employee Provident Fund (EPF) contribution. The mandatory limit at present is 12% of your basic salary.
Other Important Stuff
Two more important financial tasks that every individual should, without fail, do:
Fill and submit Form 15G/15H if you want to evade TDS on your interest income (applicable if your interest income is greater than Rs. 10,000). Also, these forms can be submitted only if the tax on your total income is nil and the gross interest received during the financial year is less than Rs. 2.5 lakh (which is the basic exemption limit).
Form 15G is applicable to all individuals who are below 60 years of age, Hindu Undivided Families (HUFs) and trusts. Form 15H is applicable for individuals above 60 years of age.
And finally, don’t forget to file your ITR by the 31st of July. If you delay or don’t file, you will be attracting a penalty fee. Individuals earning more than 5 lakh a year will attract Rs. 5,000 penalty if they file their ITR late but before 31st December, and Rs. 10,000 if filed after 31st of December. For taxpayers below Rs. 5 lakh bracket, a penalty of Rs. 1,000 is applicable.
Focus on the above-mentioned areas and your finances will be sorted. Good luck!