Apart from just filling tax declaration form in your office, you should also consider reviewing your financial goals at the start of a financial year. Although long term financial goals do not change but you may have to make some adjustments in the light of developments that have occurred over the past year. A look at the current scenario based on which one can plan their finances.
RBI rate cut
Recently RBI has cut repo rate by 25 bps. As interest rates continue to reduce so will be the reduction in fixed deposit rates. In case your financial needs require you to have a fixed deposit, you should create a fixed deposit immediately before banks cut the rates further. Although reduction in FD rates is not a good news but home loan rates will also be reduced. This reduction can help you reduce home loan EMI burden and/or reduce the loan tenure.
For new loans, banks are expected to adopt marginal cost of funds-based lending rate (MCLR). The new framework requires banks to set rates based on their marginal cost of funds rather than their average cost of funds and is introduced to improve the transmission of cuts in policy rates to the end-borrowers. If banks pass on the full benefit of the cut, borrowers stand to gain a lot.
Equity
Last year small cap and mid cap equity have performed better than large-cap equity. Despite last year’s anomalous performance, you should continue to have the bulk of your core portfolio, 75-80 per cent, in large-cap index fund for stability, and only 20-25 per cent in mid-cap and small-cap concentrated equity portfolio.
Debt
The purpose of investing in debt is regular income. You should not invest in debt for growth. Investing in long term debt has more volatility than equity. Therefore, invest in short-term debt funds that can provide you stable return. Although you can invest directly in debt but investing in debt through a mutual fund may be easier.
Traditional fixed income
RBI rate cuts are driven by inflation in the economy. It’s a good news that inflation is low and that is why RBI is able to reduce these rates. These cuts would have an impact on other saving vehicles such as PF, PPF, NSC and post office schemes. However, your over all investment strategy linked with these instruments should not change.
Gold
The sharp run-up in gold prices over three months, owing to the rise in risk aversion globally, took most people by surprise. This should not change your investment strategy. Invest in gold to meet any specific objective that requires you to have gold, say marriage. Instead of using gold Exchange-traded funds (ETFs), which carry an expense ratio of 0.75-1 per cent, invest via gold bonds, which offer an annual interest rate of 2.75 per cent. The Budget made gold bonds more attractive by exempting these from capital gains tax at redemption.
Tax planning
Don't leave tax planning for the end of the year, otherwise you may have to scramble for funds during end of the year. Investors with a higher risk appetite could start a Systematic Investment Plan (SIP) in an Equity Linked Savings Schemes (ELSS) fund, which can give higher returns. With 40 per cent of the National Pension System (NP S) corpus tax-free at withdrawal, NPS has become more attractive. Open an NPS account if you have not done so already and enjoy the additional tax deduction of `50,000.
Tax-free bonds are another good option. Nabard’s recent issue carried a coupon of 7.29 per cent for 10 years and 7.64 per cent for 15 years. Beside getting tax-free income, investors stand to get the benefit of capital appreciation if interest rates are cut. These are good options for investors who are on high income tax bracket and need regular income.
(The writer is founder of ankurkapur.in, an investment advisory firm. He is a SEBI registered Investment Adviser and is also a CFA from CFA Institute, USA and CFP from FPSB India)