We were hoping for life to be normal again. The roll out of Covid-19 vaccines sent some relief all across the world. However, the pandemic is raising its head again in India, with the number of daily cases as well as casualties going up again. While we are hopeful that things won’t reach the stage they did last year, one can never predict completely.
Last year, same time, people were caught off-guard with no room left to plan for an uncertain short-term and medium-term future. This time however, we will not have an excuse, if things go south, god forbid, from here again.
This is also a good time to revisit your personal finances in general, and your investment portfolio in particular, as we will soon be entering a new financial year. Let us understand why.
This is probably the most plausible reason to revisit your financial planning at this stage. Most large corporate organisations schedule their annual increment and appraisal cycles around this time. If you are a lucky person getting a raise, don’t just spend all of it.
If you are in the armed forces, this is the time when your annual increment has either just happened or is about to happen.
Put some thought around how you plan to use it and whether that is the best possible option. Certainly, it is important to pamper yourself by some amount of indulgence for yourself and your family. But, make sure you put the raise to good use beyond the short-term.
Annual Tax Planning
As you must be observing right now or might have observed over the past few weeks, many people end up taking hasty decisions with respect to their tax planning towards the end of the financial year.
In spite of us harping on tax planning throughout the year, we still get numerous frantic calls in last 15 days of March on what to do to save tax under section 80C!
In fact, this should ideally be a good time to effectively plan for the next financial year. Not just that, if you plan efficiently, you will notice that tax planning for tax benefits for investments and insurance needs to be done only once in most cases. Let us explain.
Suppose you decide right now that in 2021-22, you will be disciplined with your annual tax planning. You will make the purchase of must-have financial products like health insurance and term life insurance, if so required by you, right in the beginning of the financial year, or in the initial few months. Then over the next few months you can invest the remainder of your 80C investments wisely in provident fund, public provident fund, or tax-saving mutual funds, as you choose.
Next year in March, you will then be worry free, unlike many of your peers. Then, a major part of your tax-saving investments for the year 2022-23 will automatically align with your payments in the early part of the financial year. This takes away the burden of last-minute planning and removes the errors that come in with last minute execution of hasty decisions.
Portfolio Rebalancing and Medium-Term Tax Planning
People who already have an investment portfolio might find this to be a good opportunity to analyse the performance of the portfolio and make adjustments to fine-tune it. While portfolio rebalancing should not wait for the change of a financial year, this time is helpful in a different way.
Suppose you have a financial goal coming up in the next year or two. You have been planning for this goal for a few years now and have been investing the savings for the same in equity mutual funds. This is the perfect time for you to evaluate the investment vis-à-vis the goal and start moving that amount from the equity funds to either debt funds or to your savings account. The reason being that if you make the withdrawal at the last minute without planning, your gains might be taxed at a higher rate for the long-term capital gains.
Instead, if you make withdrawals every year over the next couple of years, you can plan in a way that your returns are within the permitted range of tax-free capital gains. Not just tax efficiency, this will also shield your upcoming financial goals from market volatility.
Financial planning is not just about planning, but also calls for discipline in decision making as well as in implementation of those decisions. The beginning of the financial year is a good time to start with an efficient plan. The most crucial aspect of this journey is timely rebalancing of portfolio to ensure tax-efficiency as well as to meet financial goals timely.