Plan Investments For The New Financial Year
Earning, saving and investing should ideally be done simultaneously. But while most of us earn on a monthly basis, investments tend to get postponed—often, to the last quarter of the financial year (FY), and that too, to save on paying taxes. Since these are usually last-minute and unplanned investments, it is likely that money is put into products that may not be suitable. For instance, buying yet another insurance policy, irrespective of adequate pre-existing coverage. For best results, it’s important to ensure that both investing and tax planning are done in advance so that only those products that are in line with an investor’s financial goals are selected.
The beginning of a financial year is an ideal time for tax planning or to revisit the existing portfolio. “It gives an investor the opportunity to correct her past financial mistakes or to begin with a new approach to managing personal finances,” said Nitin B. Vyakaranam, founder and chief executive officer, ArthaYantra, a personal finance advisory.
The two basic elements of analyzing a portfolio at such a point are to look at the existing commitments, and to see what effect changes in rules and regulations have on these. Besides that, salary increments and bonuses are usually announced in the first quarter of an FY. “This helps you plan cash flows more effectively as you have a better idea of the amount of increase in salary,” said Varun Girilal, co-founder and executive director, Mitraz Financial Services Pvt. Ltd.
Prior planning also means spreading the investment plan to cover the year, which will reduce the burden of investing to save on taxes in the last few months. “The habit of rushing at the last minute to avail benefits does not work in the long term,” said Vyakaranam.
But before planning ahead, it’s best to take a step back and see what’s already in your investment portfolio.
Before committing to further investments, ensure that your previous ones are in line with your objectives.
“Check if the asset allocation still holds true,” said Suresh Sadagopan, a Mumbai-based financial planner. For instance, evaluate the debt-equity balance. Given that equity markets had a good run in 2014, some switching between assets classes may be needed to re-balance the portfolio, so that it remains aligned to the goals.
The basic objective behind tracking a mutual fund scheme, or any other product, is to see if the reasons for which you had invested in it initially still hold. If the scheme has strayed from its path, your goals could get affected. So, a decision has to be taken on whether it stays or not.
After the evaluation of an existing portfolio comes getting rid of non-performing investments, and rebalancing the portfolio accordingly. If you find that existing investments exhaust your tax benefit limits, then saving on taxes doesn’t have to drive your investment planning. You could instead focus on, say, high-return instruments.
Minimum annual contribution is Rs.6, 000, and your money gets locked in till you turn 60. Under section 80CCD of the income-tax Act, 10% of salary invested in NPS is eligible for a tax deduction of up to Rs.1.5 lakh. This limit will go up by Rs.50, 000—taking the total to Rs.2 lakh—once the finance bill is passed. Apart from this, if your employer, too, chooses to contribute to your NPS account, then contribution equal to 10% of your salary is deductible in your hands under section 80CCD(2).
If you are a senior citizen, an additional option is to invest in Senior Citizens’ saving plans Scheme which will qualify under section 80C. Interest rate on this has been raised for FY2015-16 from 9.2% to 9.3% per annum.
There may be modifications to be considered apart from those on tax benefits. For example, if you are considering fixed deposits, look at the policy rate cuts by the Reserve Bank of India.
However, investment strategies also depend upon time horizons. For short-term investment horizon, debt funds are more suitable. For medium-term horizon, fixed maturity plans (FMP) of five-year tenor and income funds are suitable. For longer term, equity exposure is advisable.
As the above mentioned examples show, proper planning—be it to save on tax or for investing—helps you manage cash flow for the entire year, and achieve financial goals in the long term.