As we approach the end of this calendar year, it is time to review our financial goals. This review becomes critical to see how far we have reached in achieving those goals, apart from adjusting to new dynamics.
Importance of planning your financial journey
When you start a journey, you have a destination in your mind and, depending on the availability of time and resource constraints, you choose your mode/s of transport for reaching the destination. In case you are travelling by road, you keep on watching the milestones to check how far you have reached and how far your destination is. Depending on the speed and pace, you may have to accelerate the speed and probably skip some of the halts during our journey. This review of the speed and journey is equally, or rather more important, in the case of your financial journey.
For all of us, earning in life is normally fixed due to the retirement age and our physical ability to work beyond a certain age. We make our investments keeping our various goals in mind. The goals may vary from education and marriage of children to buying a house to the most important one, like owning a retirement plan.
Why an annual review of goals and investments, and how to go about it
All the financial planners insist on an annual review of the financial plan. The annual review includes a review of the goals as well as a review of the performance of the investments made by us for achieving these goals. So many life-changing events, like marriage or the birth of a child, necessitate a review of our goals as these events add or change our priorities. So any life-changing event will require that you redraw your financial plan.
Likewise change of job as well change in income levels will bring in changes in your disposable income. These changes need to be duly reflected in the investments we make. With increased income, we need to allocate more funds for various goals.
While planning investments, we presume our investments will fetch certain returns, based on the market conditions and historical returns of the particular asset class. The type of investments we make also depends on our own risk profile. As far as existing goals are concerned, there may be some events which may bring about a total change in your goals. Either the goal may get enlarged, or it may become altogether redundant. So, the present amount of investment made through Systematic Investment Plan (SIP) in mutual funds will have to undergo a change, and the investments may also have to be reassigned to a different goal in case the goal has become redundant.
The review of your investments also reveals that some of the investments made in mutual fund schemes are not performing well, and thus, you may have to stop the SIP in the schemes which are not performing well and replace them with better-performing ones.
In addition to reviewing the performance of the individual schemes of mutual funds, you also need to take stock of the overall asset allocation. Depending on the performance of a particular asset class during the year, rebalancing of the asset allocation needs to be done in case of any deviation from the ideal models. This will minimise the risk and optimise returns on the present investments.
So, in case the equity market is going through a bull phase, pushing up the relative share of equity in the overall asset allocation based on current valuations, you may need to transfer some of the equity to debt instruments to bring it in line with the original asset allocation. The bear market, in turn, will require shifting some of your investments from debt to equity.
This review of the performance of individual investments as well as the overall asset class is very important for accumulating the required funds within the set time frame and for meeting desired goals.
Review of insurance needs
Like reviewing the financial goals and investments, it is equally important for you to review your insurance portfolio. Due to various life-changing events, your insurance needs may undergo some changes. Like your marriage will enhance your insurance needs, so will the birth of a child in the family. Also, increased levels of income normally bring in an improved lifestyle and thus necessitate a review of the life insurance needs.
As a thumb rule, one needs to have life insurance equal to 12 times his/her annual income, and since the income normally goes up at least to keep pace with inflation, you need to review and enhance your life insurance needs based on changed circumstances, as mentioned above, including increased income.
Education and medical treatment have the highest inflation rate in India. So, in case you have bought health insurance for yourself, you need to review your health insurance needs, looking at the current costs of treatments for major diseases.
Moreover, in case you have been diagnosed with any lifestyle diseases like hypertension or diabetes, you need to enhance the health insurance cover to meet the cost of treatment of diseases which generally emanate from the former ones in due course. Treatment for such diseases may not be required immediately, but may be required in future.
Since pre-existing diseases may not be covered immediately and have a generally waiting period of a few years, enhancing the health insurance cover at the earliest will help you cover the cost of treatment when needed. If you are covered under group health insurance provided by your employer, it is advisable to have your own independent health insurance as well and what better time to do this than now?
The writer is a tax and investment expert and can be reached at ja*********@***il.com and his X handle @jainbalwant
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