Skip to main content

Play safe In a high inflation and low returns scenario like this

The Indian household has been facing the brunt of high interest rates and inflation for some time. The Reserve Bank of India's battle with inflation has led to a sharp rise in interest rates. Over the last 15 months, it has raised indicative rates — repo and reverse repo —10 times. At 9.06 per cent in May, the consumer price index continues to hurt.

The latest increase in the prices of diesel, kerosene and liquefied petroleum gas (LPG) to `41.12 a litre, 14.83 a litre and `50 a cylinder, respectively, will only worsen things for the Indian household.

The new rates will impact almost everyone. Given the 50 per cent correlation between fuel price inflation and core inflation, the second round effect on non-fuel items will be significant, with the headline inflation metric for July possibly returning to the double-digit territory.

Together, LPG, kerosene and diesel have a weightage of 7.4 per cent in the wholesale price index (WPI). According to a report by Macquarie, the current rise in prices is expected to increase inflation levels by another 70 basis points.

Debt investments: Raising interest rates to curtail inflation is generally good news for the debt market. However, with the rates yet to catch up with inflation, most debt funds have not been able to give real returns.

Fixed deposits, bonds and public provident fund (PPF) are safe investment options for now. However, even as they minimise the wealth-eroding effect of inflation, they do not really beat it.

Investments: The Sensex isn't giving much comfort either. Last October, there was sense of relief when it hit the 22,000mark. But, over the last eight months, it has dropped to the current level of 18,000 points.

According to economists, a high-inflation scenario dampens the market sentiment significantly. Over the last decade, the Sensex has given average returns of 0.8 per cent during times when inflation crossed five per cent. When the latter has been low, the average monthly returns, at 2.9 per cent, have been substantially higher.

You are indeed sitting on pots of money if you invested way back in 2003, when the Sensex was at 3,000 points. However, if you had invested a lump sum in January 2008, you are more likely to be counting losses. Also, once inflation comes into play, the real returns from investments in Nifty, large-cap and mid-cap funds and 10-year government securities (G-secs) would be negative. (Though one cannot invest in G-secs directly, it is used as a benchmark for debt instruments.)

What to do: In such times, it is a tough call for consumers and investors alike. If one were to go by the Nielson Global Consumer Confidence Index, thriftiness is in. The report showed 72 per cent of Indians have changed spending habits to curtail household expenses.

A good percentage of the respondents said they would cut on expenses such as home entertainment, telephone expenses and holidays. The index also pointed out that 51 per cent of Indians surveyed said they spent less on buying clothes now.

Liabilities like equated monthly instalments (EMI), bills, maintenance, etc, should be paid off as quickly as possible. One could sell low yielding assets, whose returns are lower than the EMI interest rates, to pay off existing loans.

While one can't do away with fixed expenses like school fee, insurance premiums, etc, variable ones like travelling and eating out can be curtailed with a step-down strategy. Another idea catching on is pooling a car, instead of travelling to work alone. This can reduce travel expenses by 25 per cent.

As far as investing goes, the only alternative left is the 'bottom-up' stock picking approach that compares the company's fundamentals vis-à-vis market valuations.

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...
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