Target based Financial Plan needs to be reviewed periodically

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Investors must revisit financial plans regularly when higher rates push up EMIs and volatility erodes investment

Everybody talks about goal-based financial planning these days. It is taken for granted that a goal-based plan would automatically deliver future goals.

However, experts point out that goalbased planning cannot be a 'do it and forget it' exercise — especially when the external environment is volatile like the current situation. Assumptions on expected returns on equities have gone wrong in the past five years. Debt mutual funds have given negative returns in the recent past. Interest rates on home loans have gone up, pushing up EMI. There are no meaningful hikes in income in an otherwise slowing economy

When calculations go wrong, people tend to tweak their plan. For example, when higher EMI or pay cut put strain on cash flows, one may cut down on investments or postpone the increase in allocations committed earlier. A depressed equity market or debt market could also upset return calculations.

Review is the key

Goal-based financial planning works when you take the regular reviews of financial plan seriously. Most financial planners stress that goal-based financial planning is not a product but a process. And if you have taken the yearly review seriously, there is a low chance that you would go off track by a wide margin. However, there could still be some troubles ahead.

If a financial planner has accounted for 18-20% returns on equity allocation, you may not be able to achieve your goals on time because of the poor performance of equities in the last few years. There is no quick fix here. You have to be patient and the corrective actions too will take some time to deliver.

Slash discretionary spending

If you are running on tight budget, you may have to prioritise your goals. List your goals and identify the more important ones. For example, if you are planning to upgrade your car this year and you also have to pay for your son's college fees after three years and you are running short of money, just scrap the car-upgrade plan. In short, you should take a hard look at discretionary spends if you have budget constraints.

Most financial planners ask their clients to identify opportunities to cut on the discretionary spends such as eating out, movies, week-end visits to malls. In some cases, the high-cost loans are the culprits. If you can transfer your personal loans to asset-backed loans such as home against property or loans against gold, you save a good amount of money on interest. You can also consider switching a high-cost home loan to a low-cost one.

Don't wait till the last moment

Volatile situations such as the current one also need prudent decisions. If an important goal is due next year, it is better to invest all the money in conservative investment options such as liquid funds or fixed deposits. Just because you are running short of funds to achieve your financial goals due next year, do not bet available money on risky assets such as equities to make some quick buck. It may backfire if equities continue to fall further. Protection of wealth is a more important component of financial planning, he asserts.

First Things First

List your goals and prioritise them Allocate more weight to needs and less to wants
In case of a short fall of funds, push your goals forward
In case of a short fall of funds, push your goals forward
Do not bet available money on risky assets to make a quick buck Stick to your asset allocation and keep rebalancing at regular intervals

Happy Investing!!

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