Business Today

Post-Budget game plan

Don’t focus only on the finer points of saving taxes in your post-Budget investment plans. Instead, channel the savings to build wealth.

Clifford Alvares        Print Edition: August 9, 2009

If you have been waiting for the Budget to make a new investment plan or to map your taxsaving moves, then the time to re-jig your portfolio is now. The Finance Minister has not introduced any major changes to the tax code that will affect your personal finances significantly, except for an increase in the income tax limits.

Three steps to a sound investment plan
Cash is good, but don’t stash
The Budget has left a little more money in your hands. Invest it in liquid funds for the moment but keep an eye for a heavily discounted buying opportunity.
Hone your risk-taking ability
Wild swings are getting increasingly common as traders and arbitrageurs go for a quick buck. Accept these short-term knee-jerk reactions as a part of the risk of investing.
Tax investing just got passé
The Finance Minister mentioned that tax exemptions are on their way out. Don’t see the Budget for tax-planning cues, instead focus on building capital.

While this may not increase your paperwork, the Budget does boost the disposable income in your hands. For individuals in the higher bracket, the savings will be higher. This extra income will mean extra spending power when you next visit the shopping mall. But unlike most of us, savvy individuals are already planning their next investment move with this cash.

Tucked into the Budget are bits of information that you can use to take your post-Budget investment plan on the right track, and stash the extra money that you save through the tax-cuts. Smart investors, in particular, have long scanned the Budget document for cues and investing ideas.

Some have even made their investing moves, and so for those still looking to get a hang of the market, it might seem that the best opportunities have passed by. But when it comes to investing, most investors really need not worry of being a late entrant to the show. Budget proposals take time to implement and rarely change the investing scenario immediately. This leaves enough time for investors to play catch up.

So, where should you begin and how will the proposals impact the various components of your portfolio? For starters, keep an eye on interest rates as that’s turning out to be one big area of concern. The governmentbudgeted borrowing programme is going to be around Rs 4 lakh crore, which is expected to crowd out private sector borrowings from the market. As the demand for funds increases both from the private sector and the government, investors can expect further pressure on interest rates.

Re-align your investments
Avoid long-term fixed income
You can invest in medium- and short-term bond funds, as interest rate could harden due to the govt’s increase in domestic borrowing.
Stay invested in floaters and liquid
Short-term floater funds can make decent returns in case the yield curve in the short end goes up. Shift a part of your long-term bond funds into the liquid and floater funds.
Buy the rural story
You may be able to craft a low-risk portfolio by investing in companies that have a rural growth strategy in place in consumer and capital goods, and rural infrastructure.

Says Lakshmi Iyer, Head, Fixed Income and Products, Kotak Mutual Fund: “My sense is that the increase in borrowings and the fiscal deficit is a big dampener.” In the short term, though, interest rates are expected to be benign as there’s enough liquid cash in the system. But as the government’s borrowing programme perks up later in the year, to finance its various social programmes, the pressure on rates will begin to tell.

Bond Funds
For mutual fund investors, the best strategy is to stick to short-term bond funds or liquid funds. That’s because an increase in interest rates will see a drop in the price of medium-to long-term bonds. As bond prices dip, long-term bond fund NAVs will take a beating, and chances are that investors holding them could negate all the gains made by interest income that accrues to bond funds. Says Rajesh Krishnamoorthy, Managing Director, iFast Financial: “I would discourage people from longterm bond funds. There are certain sweet spots in the middle of the yield curve that are better for now.”

As short-term bond funds hold instruments with a lower maturity, say, of less than a year, the impact of a rise in interest rate is minimal. Says Iyer: “Investors should make a few tactical moves and look at the shortterm maturities. It’s where there’s a trading cushion and investors could get some kind of alpha or market beating performance.”

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