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While tax-savings should be the desired side effect of implementing a well thought-out goal-specific financial plan, most people in India do the opposite. They hurry to save taxes and feel that their job is done.

Are you the kind of investor who prioritises or considers tax maximisation as a financial goal? Tax saving is the outcome of an investment activity and making it your financial goal can take away from the overall incentive of investment planning. If you think about it, you may realise that achieving of your financial goals is more important than maximizing your taxes. You can’t tell your child when he/she is 18 that you were unable to save enough money for higher education as you were busy maximizing tax-saving by investing in unsuitable products. Can you?

“I don’t subscribe to the idea of tax-saving being a financial goal. Financial goals should be real life goals that need money. Like children’s higher education, your retirement, or things like house purchase. When your goal is maximizing your tax saving, you may end up putting money in products that no doubt help you save tax, but they are not suitable for your requirements or goals. In the long-term, product suitability is more important. And that cannot be achieved if you focus on saving taxes alone,” said Dev Ashish, founder at StableInvestor.com and a SEBI-registered Fee-Based Investment Advisor (RIA).

In fact, according to Avinnash Gorakshakar, research director at Profitmart Securities, “If a particular investment is really not attractive then looking purely at the tax outgo will not help the investor gain any significant returns either. Normally one must look at the reward potential in the given time and then think of tax as a marginal charge of holding a investment.”

Tax planning without goal setting?

While tax-savings should be the desired side effect of implementing a well thought-out goal-specific financial plan, most people in India do the opposite. They hurry to save taxes and feel that their job is done. But that is as far from the truth as it can get. Investors fail to realise that tax saving is not the most important part of their financial lives.

“Tax planning without goal setting will make you take wrong financial decisions.Therefore tax planning and goal setting should go hand in hand. For example, buying a wrong insurance product which has high commission and low money back just to save tax will hamper your future goals,” said Gauri Chadha, tax expert.

She added further, “While tax compensations do present meaningful saving opportunities like people take life insurance to save tax but in turn secure family’s future too. ELSS is also very common these days where people invest in tax saving mutual funds and save tax as well as generate wealth. NPS is another example where people invest to save tax but end up securing their retirement which usually people do not plan for.”

Pillars of financial planning

Most people just invest ‘what they can’ in randomly chosen (or ill-advised) products. Result is a directionless portfolio of insufficient savings in ill-suited products. And this doesn’t help in the long run. Financial goals are real-life goals that require money in future. For example – Your 6-year old daughter’s higher education in 11-12 years that costs Rs 25 lakh today is a financial goal. If you are in your early 40s, then your retirement after 15-20 years to support monthly expenses of Rs 50,000 per month (in today’s value) is a financial goal. But will you achieve these goals? If you don’t invest in a goal-specific manner, you can’t.

“You will only achieve your goals if you are investing the right amount and it is earning the right returns by virtue of being invested in the right products. In goal-based financial planning, you keep goals at the center of the discussion. And having a goal helps as you know exactly why you are doing something. That is what will help you stay the course for several years. You get a mission and something to aim for,” Ashish asserted.

Identify your future goals

Once you identify your goal, the next questions that you need to ask yourself are:

– How much you need to achieve this goal today?

– How much more will this goal cost in future due to inflation?

– How much time is left to save for this goal?

– How much you need to invest (regularly or one time) to achieve this goal?

Financial goals have to be built in phases but, Gorakshakar feels, the key primary pillars to build financial goals are

– Starting early

– Consistently maintaining regular investments without a break

– Keeping a long time frame of at least 5 to 10 years for investments to nurture fully

– Most important ignore the market volatility and keep focus

– Do not use a short term approach to evaluate returns from investments made

How to tackle multiple goals?

And what if you have several goals to tackle? You need to sit down and prioritize. Ashish shared a quick exercise that investors must follow for meaningful investment planning.

– List down all financial goals. Small, big, needs, desires, whatever

– Against each goal, put years or time left

– Then out down the cost of the goal today

– Using proper inflation %, calculate the future cost of the goal

– Depending on how far the goal is in the future and your risk appetite, chose a proper mix of asset classes (asset allocation)

– Calculate how much you need to invest each month for each goal.

– If the total monthly investment required for all the goals is more than what you can invest, then you know that you either drop some low-priority goals Or reduce the budget for a few or work towards increasing your income.

– Next step? Begin investing without any delay!

Investing is a marathon

The primary aim of tax-saving is not to grow your money sufficiently. Rather it is to reduce your taxes. So it is possible that suggestions made in tax-reduction or tax-planning exercise might be in conflict with those made in a good goal-based financial plan. You have to find a balance here.

Also, you must understand that profitable investing is more like a marathon and not a sprint. Patience and consistency is the key to successful wealth generation.