Skip to main content

Good time for short-term debt options

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.

 

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...

How to generate a UAN Online

Best SIP Funds Online   In order to make Employees' Provident Fund (EPF) accounts portable, the Employees' Provident Fund Organisation (EPFO) had launched the facility of Universal Account Number (UAN ) in 2014. Having a UAN is now mandatory if you have an EPF account and are contributing to it. So far, you got this number from your employer and every time you changed jobs, you had to furnish this number to the new employer.  However, in order to make it easier for you to get a UAN , and without your employer's intervention, the EPFO now allows you to go online and generate a UAN on your own. This facility can be used by freshers, or new employees, who are joining the workforce as well as by employees who have older EPF accounts but do not have a UAN as yet. As a new employee, you can simply generate a UAN and provide the number to your employer at the time of joining, when you need to fill up forms for your EPF contribution. As per a circula...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now