Here's how to rework your tax strategy

Hello, this is a call from your bank. May I help you with your investment planning, sir? Haven’t you been bothered by such persistent calls? Indeed, the new financial year is here and it’s again time to freshen your investment outlook and rejig the portfolio, particularly in view of the budgetary changes and new opportunities knocking at your door.

True, with the Indian economy on a secular growth path, there have been opportunities galore. Experts too believe that the same can sustain in the current as well as the coming years at more or less the same level, if not higher ones, driven by multiple economic growth drivers which include favourable demographics, consumption demand and investments in infrastructure, which may result in robust corporate earnings. Still, things like volatility in the markets and the uptrend in interest rates have to be factored in before taking a call on investments.

Says Dinesh Thakkar, CMD, Angel Broking, “At the outset, investors should bear in mind that the current phase of spiralling interest rates is bound to have a deflationary effect on all asset classes, including equity and real estate, thus bringing prices of all assets lower to justify relative valuation to returns on risk-free assets like bank FD and bonds. Also, as the cost of money increases, there will be less demand for assets due to less investable surplus, thus putting downward pressures on the prices of all the assets.”

Therefore, to be on the safer side, individuals should first utilise the existing tax-savings avenues fully, i.e. one should make investments up to Rs 1 lakh to avail the benefit of Sec 80C deduction. “These include PF, PPF, NSC, repayment of principal amount of housing loan, and life insurance policy premium, among others,” informs Vikal Vasal, director, KPMG India.

It is advisable that adequate life insurance cover is taken by the individuals, especially where the family is mainly dependent upon the sole earning member. Further, one should also try to avail the tax benefit in respect of mediclaim policies for self and dependants, he says.

From long-term perspective, systematic investment plans (SIP) of mutual funds are also considered a good option as individuals do not have the expertise of analysing the stocks/monitoring the same on regular basis. Also, irrespective of one’s age/income level, one must plan for some regular income after retirement.

Some experts, however, are of the view that budget hardly matters, except for the changes in personal tax structure.
For instance, Devendra Nevgi, CEO & CIO, Quantum Asset Management Company, says, “It’s advisable for an individual not to respond to the daily changing investment scenario. Individual investors have to understand their own risk appetite & time horizon before they take a call on any investment. The costs associated with such investments also have to be lower.”

Rahul Aggarwal, CEO, Optima Risk and Insurance Management Services, agrees. “Good investment planning should be with a long-term view. Any investment, at whichever stage of life, should foremost be done with the objective of long-term financial goals. If this is kept in mind, then the influence of current investment scenario and budgetary changes diminishes on the investment outlook. It is our view that individual investors should look at fixed return securities like fixed deposits, reasonably-priced IPOs and real estate in growth areas of the country. The mix of these will depend upon the risk bearing capacity of the investor,” he says.

But despite the current high volatility in the markets, experts still seem to be bullish on stocks. “Stocks will continue to deliver reasonable returns from the long-term perspective, though it’s difficult for the asset class to repeat its 2006 performance in 2007. Even though the rates of 9% plus growth may not be sustained, India’s growth story continues to remains attractive compared to its global peers, even at a trend growth rate of say 6.5-7% for the next decade. Investors, thus, have to balance there risks & return expectations and be patient in wealth creation,” says Nevgi.

Sivasubramanian K N, senior portfolio manager-equity, Franklin Templeton, also seems to be of the same view. “The rapid upward and downward movements in the stock markets in recent times mean that over the short term, further volatility cannot be ruled out. However, India has much better balance in its growth model than the rest of the Asian region -- giving it a built-in macro resilience that other emerging economies lack. We believe this would help Indian markets over the medium to long term, as investors recognise the underlying strong fundamentals. Any sharp corrections from these levels can be used to increase exposure to equities,” he says.

Surprisingly, the overheated real estate, which has been the darling of investors for the last couple of years, seems to be fast losing its sheen, at least for the time being. “We would advise investors to stay away from the real estate for a year or so due to the recent sharp run-ups in prices. Furthermore, owing to thin liquidity in this asset class, it will take some time for it to get adjusted to a high interest regime,” advises Thakkar.


Likewise, bank deposits seem to be attractive, thanks to the rising interest rates. But, once again, some experts believe it to be a temporary phenomenon as once supply issues are addressed and inflation is tamed, we may see a drop in interest rates.

NEW AVENUES

The good news for investors, however, seems to be the emergence and growth of new investment avenues which till a few years back were missing in a rather controlled economy.

Says Tushar Pradhan, chief investment officer - equities, AIG Global Asset Management Company (India), “Investment avenues become available either when regulation allows a certain class to enter the markets or if by rotation some asset classes become attractive for various reasons. The regulators are evaluating the possibility of allowing real estate mutual funds, and investing in art has already become somewhat popular. However, such alternative investments are peculiar to their class and lay investors should be armed with enough research on them before considering investing in them.”

Also, with the Indian being increasingly integrated with the global economy, “we might see demand developing for sophisticated investment products such as absolute return funds, alpha strategies (including portable alpha), tactical asset allocation (across asset classes/currencies) and quantitative strategies. amongst the institutional segment. From a retail investor perspective, we believe final guidelines for real estate and infrastructure funds will see the emergence of new investment avenues that will help them in participating in the growth potential of the infrastructure/real estate sectors. Also, formulation of overseas investment guidelines might see the launch of dedicated overseas funds and feeder funds,” says Sivasubramanian.

Recently, the government permitted individuals to investment in international markets to the tune of $50,000 per annum, giving them an opportunity to invest in international markets. “Although this option is still nascent and in its first year of operations, we see this avenue opening up significantly over the coming years. People must use it to de-risk themselves from investing in just one country,” advises Thakkar.

Amongst the new avenues that have emerged for individual investors are also the Gold ETFs & capital protection-oriented funds. “Real estate managed funds & ETFs, when allowed, will offer access to retail investors’ exposure to the real estate market. Gold ETF remains a good long-term investment and an inflation hedge. Mutual funds are now offering funds which invest in international markets,” informs Nevgi.

NEED-DRIVEN INVESTMENTS

But whatever be the avenue, experts advise investors to have a medium-to-long-term view while investing in growth markets like India, besides taking into account individual needs also. “We subscribe to the life-cycle theory of investment wherein the stage of one’s life decides exposure to various asset classes, added to the pressures of maintaining a dwelling unit,” says Pradhan.

For example, younger people should have more exposure to equities as they are in the accumulation stage. As one gets older and incomes grow, there is a need for capital preservation and allocation to fixed interest (as opposed to fixed income investments) could be added to.

“In addition, one should also have liquid investments to meet short-term contingencies by way of either bank deposits or liquid funds. However, tax slabs, quantum available for investments and sundry other issues really do make this a very individual affair. Last, but not the least, is the individual’s appetite for risk,” he adds.

HEDGING RISK

However, hefty returns alone should not be the sole criteria for investments. Says Pradhan, “In any scenario, investors should be aware of the products they are buying. Even in equity mutual funds all funds are not alike. One should read the various offer documents to ascertain the appropriateness of the investments to one’s portfolio. Investors will also be well served by educating themselves about expectations of returns to ensure not getting carried away by false claims. For example, there doesn’t exist any investment in the world which can sustain a 25% rate of growth for ever!”

Besides, one should be cautious while making any investment and not just be guided by the trends in the market. Diversifying investments also helps. “One should strive to invest in at least four to five different investment options so that downfall in one does not have a major impact on the long-term plans/funds requirements of the individual,” advises Vasal. No need to mention that precautions and the right approach to investments alone may yield you the desired result.