Nikhil Walavalkar, ET Bureau Aug 20, 2013, 05.08AM IST | Economic Times
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 goal-based 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 (RoEs) 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,” says Harshvardhan Roongta, principal financial planner of Roongta Securities.
All these factors cited by Roongta could have an adverse impact on the financial plan. When calculations go wrong, people tend to tweak knowingly or unknowingly 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 and lead to failure in meeting the deadline.
Review is the key
“Goal-based financial planning works when you take the regular reviews of financial plan seriously,” says Amar Pandit, founder and CEO of My Financial Advisor. Most financial planners point out to 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,” says a wealth manager, who doesn’t want to be named.
If you are running behind schedule to reach your goals, you should revisit your financial plan. “There is no quick fix here. You have to be patient and the corrective actions too will take some time to deliver,” says Amar Pandit. You have two choices: either push your goals forward or put more money to meet the earlier deadline, Pandit says.
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,” says Mukund Seshadri, founder partner of MSV Financial Planners.
For example, if you are planning to upgrade your car this year and you also have to pay for your son’s college fees abroad after three years and you are running short of money, just scrap the car-upgrade plan. Move that money towards your goal of son’s education.
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, which can be used to invest and remain on path to your financial goal. You can also consider switching a high-cost home loan to a low-cost one.
Volatile situations such as the current one also need prudent investment 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,” says Roongta. Mukund Seshadri warns: “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.
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