Posted on 7/29/2022 10:58:00 AM

How to set financial goals
When it comes to planning one’s finances, different individuals have different financial goals. These goals may be short, medium or long term in nature. As a result, the financial instruments one can use to achieve these goals also varies. AS a result, much needs to though about when charting out one’s financial goals and the means to achieve it. Given below are six easy steps on how one can go about planning their financial goals.

Doing it in five easy steps
1.List them out-
Often, when asked to list out their financial goals, folks think that only the big stuff matters - buying a home, securing a post-grad degree for their children, their own retirement etc. But while such lofty goals certainly shouldn’t be left out of your financial plans, the small stuff matters too. If you’re planning to upgrade your laptop or two-wheeler in a year’s time or have plans to buy your parents a home theatre, these goals require financing too and must figure in your list. Including smaller goals in your plans ensures that you can save ahead for them instead of taking on EMIs to fund them. Two, while mapping out your goals, getting rid of liabilities should come ahead of acquiring assets. There would be no point in starting SIPs for your daughter’s degree, when you’re over-extended on your credit card limits and paying a hefty interest rate. So, list out your liabilities and make repaying them a part of your financial goal setting. Three, for us Indians, a lot of our financial goals revolve around our family and dependents. Therefore, do consult your family while mapping out your goals. There would be no point in investing towards an Ivy League STEM degree for your son, if his life dream is to become a lawyer or a theatre artist. You may as well bid goodbye to early retirement if your spouse is not on board with the idea. Consider the sums you may need to support your parents and other dependant family members while charting out goals.

2. Prioritize them-
Financial goal-setting for any family can quickly become unmanageable if you let wishful thinking compete with justifiable aspirations. When listing out family goals, classify them into needs, wants and luxuries. The distinction will depend on your financial status and life situation. For a middle-income family, a yearly vacation may be a want, but a trip to Europe may be a luxury. Securing a seat in a top-tier engineering college in India may be a want but aspiring for an Ivy League degree may be a luxury.
If some wants or luxuries seem out of reach, start early towards more modest needs and use any excess returns you make in future years to ‘upgrade’ the goal as you go along. If you suddenly receive a performance bonus at work, you can use it to upgrade your family vacation from an Indian holiday to an overseas one. A windfall from a relative can go to upgrade your son’s education corpus.

3.Protect yourself and your family-
Sudden Acts of God or misfortunes that befall you and your family can quickly derail your carefully laid plans. Therefore, obtaining a life cover, health cover and accident cover for the breadwinners of your family is an essential first step that must precede any other investments. It would also be a good idea to secure your home and belongings against natural calamities with household insurance and your family members against ill health with a floater policy. Despite these precautions, life is bound to lob some googlies at you. This requires an emergency or contingency fund that is held in liquid and absolutely safe investment avenues. While 6-9 months’ living expenses is the usual recommendation for the size of this emergency fund, the fund will need to be larger if you have dependants or work in a sector or firm with low job security. This will not make misfortunes any less painful, but it will make their financial impact less debilitating to deal with and help you get back quickly on course towards your goals.

4. Assign time horizons-
Once you have a list of goals, map out exactly when you would like to achieve them. This is essential because the kind of portfolio and asset allocation you would use to get to the goal will depend on its target date. Some goals tend to have an absolutely fixed target date, like your daughter’s education corpus that needs to be ready when she turns 18. Some tend to be flexible - like a plan to take a sabbatical from work or upgrade from a car to a SUV. The nature of the target date of your goal has a bearing on the investment avenues that you use to save towards it.

5.Create distinct portfolios-
Once you have your financial goals lined up with their time horizon, take the help of a financial advisor to construct distinct portfolios for each goal. Goal-based portfolios also help you have distinct asset allocation for each portfolio. So, less than 5-year goals may have purely debt-oriented portfolios, 5 to 7-year ones can have an equity-debt balance and more than 7-year goals can have higher equity allocations. Having separate portfolios for each goal also makes your task of monitoring and reviewing their performance easier.

6.Review and revisit-
While having well-defined goals to work towards is critical to your financial plans, do recognise that these goals cannot be cast in stone. For most folk, goals and aspirations keep changing based on one’s age, life stage and circumstances. Your daughter, who swore she wanted to be a teacher in her primary school, may change her mind and set her sights on being a microbiologist by the time she turns ten. The swank 4 BHK bungalow that you looked forward to owning in your thirties, may seem like too much trouble by the time you get to your fifties. This is why, while it makes sense make an early start on your financial goal-setting (ideally, you must start the process soon after you land your first job), it is also absolutely necessary to remain flexible about these goals as you work towards them. Reviewing and revisiting your financial goals every year can help you adapt to changing situations. There are three aspects to the process. One, at least once a year, sit down with your family to review the goals that you set, to see if you need to add new ones or discard old ones. Two, review the performance of each goal-based portfolio against its target and make adjustments to the asset allocation or investment amount if you are falling short. Take stock of changes in your income levels to see if you can step up your savings and investments, to fool-proof critical goals. Finally, and most importantly, do remember that just as the starting point on your investments make a big difference to your attaining your goas, the end-point matters too. For goals that are within three years of their target date, it is imperative to initiate a phased shift in asset allocation away from risky and volatile assets such as equities, into safe capital-protected assets such as debt. As poet Robert Burns said in his ode to a mouse - “The best laid plans of mice and men often go awry”. Many a beautifully crafted financial plan to fund a college degree or retirement has been tripped up by a last-minute collapse in the stock market that left a healthy corpus depleted. Planning a tactical exit from a goal-based plan when the going is good, can shield you from such misfortune.


There is no tax implication at the time of making the investment nor are you liable to pay any tax in respect of appreciation in NAV of the units acquired at the end of a financial year. The liability to pay tax arises only when you sell the units either through the stock exchange or redeem them from the fund house.
For the purpose of taxation, each and every transaction of an SIP is treated as separate investment and the profits are computed at the time of sale/redemption based on the FIFO (First in, First Out) method. Under the FIFO method, the units which were bought earlier are treated as having been redeemed or sold first. In case you have more than one demat account, where your mutual funds units are parked, this method of identifying the units sold is applied for each of the demat account separately.

The tax liability on the profits on sale/redemption depends on the period for which you held the units. In case of equity oriented schemes if the investment is held for less than 12 months on the date of sale/redemption, they are treated as short term capital gains (STCG), else they are treated as long term capital gains (LTCG) for taxation purposes.
While calculating the profits on units bought under SIP, profits/loss is computed with reference to each lot of the units purchased through that particular SIP. The difference between the total cost of the units sold and the sale/redemption price of the units comprised in each SIP investment is treated as capital gains.
No benefit of indexation is available in respect of LTCG on equity scheme unlike for other long term capital assets. For units acquired through SIP prior to 31st January 2018, the NAV on 31st January 2018 is taken as cost for units sold/redeemed after 12 months. So effectively any appreciation in the NAV of the scheme upto 31st January 2018 has become exempt in your hands. However, in case the actual cost of the SIP purchases is higher than the NAV on 31st January 2018 as well as the sale/redemption price, the difference is treated as capital loss and is allowed to be set off against other qualifying capital gains.
The STCG on equity units are taxed at flat rate of 15%. There is no tax liability for initial one lakh of LTCG on equity investments in equity oriented schemes and listed equity shares taken together. LTCG beyond one lakhs rupees are taxed at flat rate of 10%. Likewise, STCG on units other than equity oriented scheme are added to your regular income and gets taxed at the slab rate applicable to you but such LTCG are taxed at flat rate of 20% after indexation.
For listed securities other than units you have an option to pay tax either at 10% on LTCG without indexation or at 20% with indexation. In case you are a resident individual for tax purposes and your total income excluding the capital gains on equity schemes is less than the basic exemption limit applicable to you, your taxable capital gains shall be reduced by the short fall in the exemption limit and only the balance of such capital gains shall be taxed at the flat rates. This benefit is not available to non-resident taxpayers.
Likewise, if you are a tax resident and your total taxable income including capital gains of all nature does not exceed Rs. 5 lakhs in a year, you are entitled for a rebate under Section 87 A of Rs. 12,500/- which can be set off against any your taxability of any nature except tax payable on LTCG on equity products which are taxed at 10% as explained and you have to still pay tax on LTCG on equity products at 10% beyond initial one lakh on which no tax is payable.
Author-Aarati Krishnan
(As published in IPRU Insights)

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