Some has some strategies for investors in the light of the budget proposals
Every year in February it's Budget time, and investors have sleepless nights, anxious about the impact of the Budget on their investments. This year's Budget has spared them the agony of more taxes. The Budget has not tinkered much with the investments aspect before the implementation of the Direct Tax Code (DTC) next year. This continuity helps in developing a holistic approach to investments and planning for the long term. This is especially true while investing in fixed returns instruments such as bonds and fixed deposits where some period of lock-in exists.
Investors can, with some reasonable certainty, take their investment decisions to invest in a particular instrument after projecting the returns for a few years. This year, the Budget with its minimalist approach, will have a positive impact on all types of investment avenues over the long run.
Strategy for fixed income avenues
Long-term tax-free bonds
Some government undertakings such as the National Highways Authority of India, HUDCO etc will be allowed by this Budget to borrow up to Rs 30,000 crores for the development of infrastructure in the form of tax free bonds.
You can consider investing in these bonds for tax-free returns. However, you have to wait till each of these organisations come up with their tax-free versions of the bonds
Long-term infrastructure bonds
This year's Budget has given some additional investment avenues for fixed income investors. You can avail of one-time tax deduction for investments in infrastructure bonds up to Rs 20, 000 over and above the Rs 1 lakh limit in Section 80C. This scheme, which was introduced last year, has been extended by a year.
However, you should choose the infrastructure bonds very carefully. You should look at bonds with high credit ratings and good post-tax yields. Therefore, you should wait for the interest cycle to peak before investing in long-term bonds. Ideally, it will be till the next mid-quarter review meeting of the monetary policy scheduled on March 17, 2011. Any hike in interest rates will make long-term debt papers more attractive.
Short-term debt options
Fixed income investors may be better off investing for the short term till the rate hike cycle is complete. There are many options in debt mutual funds for the short to medium terms. Investors with a short-term time horizon of less than three months can invest in liquid funds for the next 15 days or liquid plus funds with a 3-6 months horizon.
You can even consider fixed maturity plans (FMPs) of three months to one year (strictly hold till maturity) as the short-term rates are attractive and these FMPs can generate attractive yields for investors.
You can also invest for a period of six months and more in floating rate funds. There is a double indexation benefit only till the implementation of the DTC. So, to take advantage of this, you can invest in 14 to 15 months FMPs in order to gain attractive post-tax returns.
Strategy for equity
You can consider investing in equity after the Budget either in the form of direct investments or through equity diversified mutual funds. Budget's impact on equity has been minimal. Excise duty is retained at the same levels. But the increase in the MAT (minimum alternate tax) to 18.5 percent (from 18 percent) may impact some power generation, infrastructure and IT companies.
The impact will be unfavourable, especially for smaller IT companies and BPOs. The reason is that smaller BPOs haven't yet expanded into SEZs. But on the plus side, the Budget reduces tax on revenues from foreign subsidiaries from 30 to 15 percent.
Overall, the impact on equity investments is negligible. However, you have to keep in mind the current macroeconomic scenario of high inflation and rising crude oil price before investing.
The equity markets are still in a correction zone due to the unstable macros. Hence, it may be wise to take the mutual fund systematic investment plan (SIP) route to equity investments.
