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Planning afresh

The key to a good financial year starts with noting down your short-term and long-term goals, reports Vyas Mohan.

india Updated: May 14, 2007 04:30 IST
Vyas Mohan

It is time to start over with a clean slate – a new financial year has begun. Fiscal 2007-08 is sure to be different from its phenomenal bygone with the fundamental dynamics of economy showing signs of change. This brings into play the need to appraise your goals and plan out your investment strategy for the year ahead.

Well begun is half done, they say. Financial planners say that the key to a good financial year starts with noting down your short-term and long-term goals, checking assets and outstanding liabilities and preparing a budget for the year. Making a family budget enables one to foresee large expenses that lie ahead and finance them in a better way. Finally, before starting the year, recheck on your tax saving investments to see if any change needs to be made.

“If one takes basic steps for financial security, it automatically saves tax. Thus, it is very important to check the status of your insurance policy at the beginning of the year. Finally, before starting one has to divide and prioritise his goals,” says Gaurav Mashruwala, director of an investment advisory firm.

Goals have to be divided on the basis of time so that a certain corpus of your earnings could be put in the right basket that matures when you need it. Investment advisors are of the opinion that investments aimed at fulfilling long-term goals (of more than eight years) should be directed to equity, while those that need to be addressed in less than three years should be through less volatile asset classes like fixed maturity products.

The change in interest rate scenario demands a re-look at both assets and liabilities.

With equity analysts predicting a lower rate of return of about 15-20 per cent from the asset class this year and rising interest rates pushing up bond yields, equity investments do not have that substantial premium over fixed income instruments. This shrinking equity risk premium makes fixed maturity plans more attractive as these are a safe asset class at a time when the markets are highly volatile.

On the liability front, most households would be wanting to unburden the home loan with interest expenditure on it inching up. As pre-payment of fixed rate loan invites a penalty, only those who are on a floating rate could consider shelling out more to finish off the liability sooner. Though conversion of loans from floating to fixed or vice versa could be done as per the person’s take on future interest rates, advisors warn that one need not get tensed up due to a change in interest rates and should stick on to existing plans.

“One should not make any hasty decisions and change the type of loan just because the rate cycle is on an upward swing. It all depends on the person’s expectation of future interest rates and the tenure of the loan,” says Mashruwala.

Before taking a call on converting loans, some facts need to be evaluated. Loan conversion costs 1.5-2 per cent of the outstanding loan amount. This added cost component will weigh over the EMI across the tenure of the loan. Thus, those who convert loans end up paying more than what new borrowers do.

Further, climbing interest rates are wedging the gap between floating and fixed rate loans. Fixed rate loans are now costlier by 1.5-2 per cent. Hence, a fixed rate loan converted to floating rate would cost 3-4 per cent more than a normal floating rate loan.

Financial planners say interest rates could be heading towards their peak and may reverse in the days to come. Hence, they advocate floating rate loans over fixed.

"Interest rates seem to be close to their peaks. It would be advisable to go for a floating rate loan as rates are expected to come down gradually," says Dr D Sundararajan, a financial planner.