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Time for annual financial review

Author: Balwant Jain/Sunday, December 17, 2017/Categories: Financial Planning, Expert View

Time for annual financial review

As we approach the end of this calendar year, it is time to review our financial goals both as an investor and as a taxpayer. This review becomes critical to see how far we have reached in achieving those goals apart from adjusting to new dynamics.

Financial journey is fairly equal to life’s journey.  When you start a journey, you have a destination in your mind and accordingly depending on the  availability of time and resource constraints, you chose your mode/s of transport for reaching the destination. In case, you are travelling by road, you keep on watching the mile stones to check how far you have reached and how far is  your destination. 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 case of your financial journey.

For all of us, earning life span 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 own retirement planning.

All the financial planners insist on annual review of the financial plan. The annual review includes review of the goals as well as review of the performance of the investments made by us for achieving these goals. So many life changing events like marriage or birth of a child necessitate review of our goals as these events  add new priorities as well as may change the existing ones. 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/implemented in the investments we make. With increased income, we need to allocate more funds for various goals.

Investment depends on risk profile

While making investments, we presume our investments do fetch certain returns looking at the market conditions and historical returns of the particular asset class. Type of investments we make also depend 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 review of 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, the asset allocation needs to be rebalanced in case of any deviation from the ideal allocation. 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 rebalance and transfer some of the equity to  debt instruments. The bear market in turn will require shift some of your investments from debt to equity.

Review necessary

This review of performance of individual investment as well as overall asset class is very important for accumulating the required fund within the set time frame and for meeting  desired goals.

 Like review of 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 birth of a child in the family. Also, increased levels of income normally bring in improved life style and thus necessitate review of the life insurance needs in view of the improved life style. Conversely an early retirement from earning life may require you to discontinue the existing term life insurance plans.

As a thumb rule, one needs to have life insurance equal to 12 times of 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 the health insurance needs looking at the current costs of treatments of 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 generally have  waiting period of 3 to 4 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.

Review of compliance for income tax purposes:

This is also the time of the financial year when you start receiving reminders from the finance and HR departments to submit  proof of your investments and other documents for claiming various tax benefits. So you need to review what investments have been made so far.

So first of all, you need to review the life insurance premiums paid during the current year. Compare the same with the amount actually paid during the last year as well as declared to the employer in the declaration form. This may reveal  life insurance premium you might have missed to pay and  will help you revive the  policy at the earliest.

You also need to verify the amount of investments made in ELSS through Systematic Investment Plan (SIP) till date. You will have to make good the deficiency if any of the SIP instalments have been returned unpaid by the bank for any reason.

Claim of deductions

Further, you need to review all the items of investments and expenses which are eligible for deductions under section 80 C including the ones you will make during the course of the year. In case, the aggregate of all these items falls short of the maximum limit of  Rs 1.50 lakh, you will have to do the needful

 If you still have  very high tax liability, you may consider other avenues available for tax rebates which have not yet been availed by you. One  such  avenue is contribution in your NPS (National Pension System) account. Section 80 CCD(1B) of the Income Tax Act allows you an additional deduction of Rs 50,000 every year for contribution made towards your NPS account over and above Rs 1.50   lakh (within over all limit as specified under Section 80 CCE) which is available under Section 80 CCD(1) along with other items eligible under Section 80C and 80 CCC.

If you do not  have an NPS account, I would strongly urge you to open one  now and contribute Rs 50,000 in case you are  in the highest tax slab and do not have liquidity problem.  

The above discussion is equally important for self employed person except that he will not get any reminder to submit the documents now.

I am sure this article will help you plan your savings and tax in a better way.

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Balwant Jain
Balwant Jain

Balwant Jain

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