With calendar year 2024 drawing to a close in a few days, it is interesting to look back at some of the key events that defined the year from a financial planning point of view.
Equity markets were a lot more volatile, despite giving positive returns in 2024, which impacted risk-adjusted returns. The turbulence was partially an outcome of elevated valuations and partly an outcome of geopolitical risk in Ukraine and the Middle East.
The US Fed has cut rates by 100 basis points (bps) this year, but the Reserve Bank of India (RBI) has not even started. This is adding to the risk of monetary divergence.
The one factor that impacted financial goals in a big way this year was the changes to the way capital gains on equities and other assets were taxed in the Union Budget 2024.
Review your money goals
Let us look at equity returns first. As of December 16, 2024, the Nifty has given returns of 14.9 per cent. However, considering the high volatility during most parts of the year, the actual realised returns would have been much lower for investors. This spike in volatility and geopolitical risk also meant that gold emerged as the star of the year. In the same one-year period, spot gold delivered 29.3 per cent returns, nearly twice that of equities. The year also made a case for hybrid funds over debt funds.
Spike in gold prices reminded investors of the need for gold exposure of up to 15 per cent in their portfolios as a hedge. However, capital gains tax changes will have far reaching implications. The higher rate of tax on equity short term gains (up to 20 per cent) and on equity long-term gains (up to 10 12.5 per cent) will impel investors to review the tenure and the expected corpus of their financial plans. Regarding other asset classes, the lower long term capital gain (LTCG) tax rate would be partially offset by the loss of indexation benefits.
Also read: How hike in capital gains tax rate affects investors
Restructure goals ahead of 2024
At a conceptual level, you must restructure your money goals for 2025 on five broad premises.
Firstly, be more conservative about equity return expectations in future. The Buffett Ratio is well above the historical average.
Secondly, you need to make each penny count. Don’t lock yourself into fancy unit-linked insurance policies (ULIPs) and endowment policies. Stick to good old term insurance policies, because they are the most economical, yet deliver the goods.
Thirdly, given that interest rates remain high, keep a check on borrowings; especially for consumer spending with high-cost debt.
Fourthly, financial markets and financial options are getting more complex, so avoid compulsive investing.
Lastly, year 2025 is when you need to serious reassess your goals. Ensure that your asset allocation plan is in sync with long-term goals.
Also read: Specialised investment fund: How this new investment avenue will work and help investors
Now, let us look at some key focus areas for managing money in 2025.
Inflation may hit you, without your realising it
Inflation is not just the consumer price index (CPI) figure each month. The coming year is likely to see indirect inflation, putting pressure on savings. The volatility in crude oil prices could impose an inflation tax on you. In addition, food prices may remain elevated as demand outpaces supply. Significantly, a weak rupee (USDINR futures indicate ₹86/$ by end-2025) can cause imported inflation. Your financial plan needs to take all these factors into account.
Hike savings in auto mode in 2025
As inflation rises and asset returns become uncertain, the one option is to save more. That means; you have to go beyond your typical percentage budgeting and shift to zero-base household budgeting. This will help you identify the opportunities to save more, without impacting your lifestyle.
Remember, if 2023 was the year of easy money and 2024 was of volatile money, then 2025 will be a year of tough money.
Have a long-term post-retirement earning plan
If you thought that your investments will take care of your post-retirement needs, think again. People in the US are discovering that their supposed savings are just not enough. Start building a long-term earning plan. Put your unique skills and talents to good use and start early, so that you are ready to earn even after retirement. This must be over and above your investment income.
The best test of 2025 will be how well you maintain your credit personality, apart from your credit score. Prudence will be the enduring watchword in 2025!
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