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Post-Budget game plan

Clifford Alvares     July 21, 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.”

Floater Funds
NAVs of these funds tend to move in line with the interest rates. Hence, any rise in interest rates will reflect in their performance, so you may want to add a bit of these to your investment portfolio. On the other hand, liquid funds are evergreen funds for parking your idle money. As these funds invest in very short-term debt paper, their prices don’t swing wildly like that of the long-term bond funds. Use the extra funds from the lower income tax to park your money here for any big undervalued opportunity.

Fixed Deposits
It’s prudent for fixed deposit investors to stagger their investments over a few installments in the coming months. That’s because you won’t find yourself locked-up to a lower interest. You will also be well-placed to capitalise on the better yields from a rising interest rate in the future. Any extra funds could be kept either in ultra-short term fixed deposits of 15-30 days, though their yields are not up to par, or in liquid plus funds, where the returns are slightly better. Once interest rate perks up, make the switch to high-yield fixed deposits.

Retirement
The Budget paves the way for the new National Pension Scheme (NPS) to turn into a good starting point for new investors. Contributions made to the NPS are tax deductible and any appreciation in the fund value is also exempt from tax. However, investors have to convert their funds into an annuity with a monthly pension, which is taxable in the hands of investors. But market observers are disappointed that the new NPS did not get any favourable treatment.

Says Satkam Divya, CEO, Rupeetalk.com: “As it’s a retirement planning tool, the government could have given a few more sops. In any case, the scheme is a good tool for long-term investments and it’s also open to selfemployed individuals, so the individuals at large can benefit.” As the scheme invests in equities, small investors should gain over time.

Stocks & Equity Funds
For risk takers, equity investing is the place to be. As the Finance Minister has allocated 68 per cent of the Budget to the social sector overall, a large chunk of which is directed to the rural areas, social initiatives such as infrastructure, health and the rural economic growth should all see an uptick in the coming months.

Companies with strong presence in rural areas, such as large banks, chemicals and seed companies, are all set to benefit from this growth shift to the hinterland. Says Divya: “The government’s spending drive in rural areas could benefit FMCG and infrastructure companies in the long run.”

Stocks from the consumer nondurable sector like Hindustan Unilever and Dabur are well-placed to derive a steady growth as they have a strong presence in rural areas. In autos, two-wheelers are making rapid inroads in rural areas where 60 per cent of its sales come from. Mahindra & Mahindra’s tractor sales to the rural areas will get a boost, and so will micro-irrigation companies like Jain Irrigation. Companies in the rural infrastructure arena such as water management companies, like IVRCL Infrastructure, should see an increase in their order books in the coming years.

You can, like the above, count on a few sector funds such as FMCG and thematic funds like infrastructure to yield better returns in the coming years. You may want to increase exposure to these funds, if you don’t have any. Diversified equity funds with some focus on rural stocks are better placed in this environment.

Focus on Capital Growth
While it’s prudent to tweak your portfolio towards the rural economy, shortterm investing is risky and depends on the news and fund flows into the market. So, stagger your investments. Some issues such as tax exemptions could go away in the coming years as the Finance Minister mentioned in his Budget speech. This could take the zing out of tax-saving instruments. Hence, it’s advisable to focus on building your corpus now, than look at Budgets as merely tax- saving events.

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.


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