How Oil prices are impacting in the reduction of inflation
How will the Indian Economy shape in the New Year & what’s in it for the Indian Investor?
Global Economy & the Macro impacts
Last one month, we have seen definite changes in the global market conditions in multiple areas like:
- The oil prices going below 60 USD.
- Dollar rally strengthening major currencies.
- Reduction in inflation across markets including India.
The negative impact of this reduction in oil prices will be on the oil producers. The biggest concern today is Russia. Ruble slide has become a currency panic. Russia has tried to stem the fall by increasing the interest rates by 10% to 16% (33 RUB=1USD from 61 RUB=1 USD)
Other oil dependent countries such as Venezuela & Middle East countries face uphill battles in coming future. On the flip side countries like India, China, and Indonesia will get benefits of the depressed oil prices because these countries are consumers of oil than importers.
Additionally Europe, Japan & China economies looking weak, there is a renewed movement of money back into a safe haven of USD. This has resulted in a Dollar rally across the world. The trend of this movement appears to be consistent for the next quarter.
Additionally Europe, Japan & China economies looking weak, there is a renewed movement of money back into a safe haven of USD. This has resulted in a Dollar rally across the world. The trend of this movement appears to be consistent for the next quarter.
The fear of US Federal Reserve raising interest in US has already been factored into pricing. However, it is difficult to guess the currency flight of US because it will accelerate, once the Federal Reserve decides to increase the interest rates.
With the headline inflation across the emerging markets easing bond yields would start to downward pressure. This has already started to happen across the world.
In India some of the global trends have helped to reduce the pressure on economy & have improved the economic indicators.
The government of India has also used some of the opportunities to push in long pending reforms. As oil price de-regulation is one of the most important decisions.
Inflation numbers in India has also seen a rapid decrease with November WPI (wholesale Price Inflation) rate which is turning zero year on year. This reduction also makes it a bit easier for RBI to cut interest rates in the New Year.
GDP growth is expected to start moving upwards and head the target rate of 5.5% or more by starting at this quarter.
Earnings of companies on the back of lower cost of capital are expected to rebound and contribute to better stock market performance
From macro perspective, India seems to be the major emerging economy that has strong tail wind of growth. This would enable our markets to be some of the best performing markets in the world in the coming future.
Equity markets across the world have seen a strong buzz of volatility in the last one month.
The US has largely been worried about the withdrawal of US Fed Reserve stand on interest rate hike.
Though worries exist in equity markets across US, China, Japan. Indian markets are expected to continue their good performance.
NIFTY has gone from 6100 to 8140 while Sensex has increased from 20700 to 26700. Both the indices are at their peak values in November.
There is a chance of short term corrections in the Indian market over next couple of months. However, we look at every correction in the market as a new buy-opportunity. This can be looked at as good entry point for investors.
We expect the market to rebound & close “2015-16” year strongly.
In our portfolios some our customers are having equity exposure to other emerging markets especially Asians like Singapore, Philippi, Indonesia, Malaysia, Thailand etc. Among these Indonesia will perform well in the emerging markets.
Over all the 5 years horizon of the market is also very positive. We are very comfortable with the current equity positions held by our clients. Any investment will lead to exceptional growth for long term 5 to 10 years.
Next Ten years are golden years of equity markets in India.
With WPI inflation hitting zero in November the chances of a reduction in interest rates has increased considerably.
There is a strong belief both in the Government & Industry that a reduction in the interest rates will substantially boost the growth prospects in the country.
With this background we expect bond funds to do well in the next 12 months. The overall duration of the bond portfolios of Mutual funds is expected to increase in 6 to 8 year’s horizon.
It is expected that with the medium term bond & long term bond would outstrip returns provided by other fixed income instrument such as FD’s, postal saving schemes by 300 % to 400 % basis points.
The average return expectation on the bond portfolios is 12 % to 14 % (CAGR).
We expect ArthaYantra’s portfolio to increase the exposure to medium term bond in the investment strategy.
Gold & other precious metals have been subdued in the last few quarters with oil price casting & the dollar strengthening, the expectation of revival in gold prices is low. Gold price would continue to be weak.
However, gold is viewed as a hedge for economic and geo-political risks that exists across the world. There are concerns of bubbles existing in bonds and real-estate in economies such as US and China. Gold could see a major mercuric movement, if any of these bubbles burst in the next few quarters.
Similarly if geo-political crisis such as Russia-Ukraine crisis escalates, it could galvanize gold and move upwards.
From a portfolio perspective it makes sense to have a small exposure to gold and observe the future unfold.
At ArthaYantra we feel that it is time for minute changes in the portfolios. We will be informing our customers about the portfolio rebalancing over the next few weeks.
The AY portfolio would increase exposure to medium term debt & reduce exposure to short term debt as part of the rebalancing cycle. This would allow our customers to get benefited with the potential higher returns from medium term & long term bonds.
AY has also decided to keep rest of the allocation intact for the time being. We will continue to monitor the dynamics of the changing market and we will keep you posted the other changes in the next quarter.
Tax Planning Stategies For Different Age Groups
Tax planning is one of the most important aspects of personal finance. People often fail to look at tax planning objectively and straight away start with making investments related to tax saving. Most of the people try and mix tax planning and investment planning which are totally different and are made with varying objective.Insurance for long has been the front runner whenever investments regarding tax savings are considered. Life Insurance is not an investment option but a financial tool that helps you protect the family from any unforeseen eventualities. Buying excessive insurance defying its motto leads to holding unnecessary products. Savings under section 80C can be broadly classified as: Investment based (PF, PPF, EPF, NSC, NPS, Fixed deposit, ELSS) and Non investment based (principal repayment of home loan, tuition fee). Before making investments related to tax saving it is always important that the individuals must analyze their risk appetite and determine the percentage of debt and equity exposure they are comfortable with. Then they can match these percentages of debt and equity buy investing in the available tax saving investments.Since the risk appetite, liquidity needs and current portfolio of every individual are different, making investments based on just returns is not advisable.
Tax planning age wise:
23– 30
This is generally the starting phase of career for most of the professionals. HRA should It is the right time to start saving for the future. The investments made during this phase should have a long term investment horizon. Starting to save and investing for retirement will give an edge if started at early age because of power of compounding. Investing in a mix of ELSS and Pension related schemes like EPF, NPS or EPF is a good option for professionals of this age group. By doing so, they ensure that they plan for their retirement from an early age. It also provides the advantage of providing equity exposure to their retirement fund.
It is also advisable for the professionals of this age group to get required life insurance cover and health insurance cover. They can take the advantage of low premium rates if they start during this age. Avoid falling in the trap of endowment plans and ULIPs.
31 – 36
During this phase, most of the professionals can generally take advantage of avenues of tax savings other than investments. Contribution to PF by self and employer, required life insurance cover for self and family will form the major portion of 80C. Tuition fee of the children can also be claimed under the same section.
The average age of an Indian home buyer is 30. Most of the professionals in this age group can take advantage of tax savings related to a home loan. They can claim the principal repayment under section 80C and interest repayment under section 24B. For couples who are both liable to pay tax, it is advisable to take the home loan on a joint account.
It is also advisable to take required health insurance cover for self and family which would account for section 80D.
For professionals who can still make investments under 80C, before making any tax related investments they have to chalk out the goals they want to achieve and their respective timelines. Then based on their risk appetite and time horizon, they can invest in relevant tax saving investments. Avoid over doing tax saving investments.
36 – 45
Non investment related tax savings will play a major role in tax planning even during this phase. Principal repayment on existing home loan, employer and self contribution for PF, tuition fee of children, life insurance cover for self and family account for more than 1 lakh under section 80C for most of the professionals in this age group. So, most of them need not even make any investments for tax saving. In case they have an option to invest in 80C they can opt for investments pertaining to retirement. They can even claim the interest repayment of home loan under section 24B and health insurance premium being paid for self and family under section 80D.
This is also time for the professionals to undo the past mistakes made regarding tax savings. They have to assess all their existing tax saving investments and assess the pros and cons of holding them. It is also important that they avoid over doing tax saving investments. They have to assess all their expenditures and identify the expenses which are eligible for tax savings. This gives them a fair bit of idea whether they have to make investments or not.
46 – 60
This is generally the peak earnings phase of the professionals. Most of them try to pay off their existing debts and channelize their income towards savings for retirement. The same factors of home loan, tuition fee and PF account for majority of the tax savings. Most of the professionals do not opt for health insurance other than the one provided by their organizations. But getting a health insurance at age 60, after retirement is an uphill task. Most of the service providers have a cut off age of 60. So if you need not get a health insurance by now, get one. This can be claimed under section 80D.
The cut off age for opening a PPF account is also 60. If they do not have a PPF account by now, it is advisable to start one 60 years is the cut off for opening a PPF account. In case they have to make investments, they can choose any of the debt products related to retirement. Avoid buying excessive insurance or tax saving investments.
60+
Capital protection should be the motto of the investments being made after retirement. All investments should be in debt. Retired employees looking for timely pay outs (monthly or quarterly) can consider investing in Senior Citizen Saving Schemes (SCSS). Since SCSS is backed by government, it provides high security for your capital which is essential for post retirement investments.
ELSS – How efficient is it as a Tax Saving Instrument?
Most of the working professionals scramble to buy financial products during the last quarter of the financial year. This is because they are required to submit proofs of investments made under various heads that they had given in the Investment Declaration Form at the beginning of the year. It is a common practice that professionals indicate in the Declaration form that they hold instruments which would entail them to Tax exemption for the rest of the year. But come January, when the Human Resources team reaches out to the employees to submit proofs of these investments, that is when there is a mad scramble to buy various financial products which give Tax exemption. We can safely call January-February-March to be the Killer Quarter since most of the Financial mistakes are committed during this quarter.
We decode ELSS (Equity-Linked Savings Scheme), one of the most efficient Tax Saving Instruments for you. ELSS can be understood under the following heads:
Lowest Lock-In Period
All investments made in ELSS are eligible for Tax exemption for the minimum lock-in period of 3 years. This makes ELSS one of the most efficient Tax Saving Instruments. Also, the investor need not exit the ELSS after the expiry of the maturity period. They can stay invested for longer periods also. So what happens if an investor wants to withdraw his investment before the lock-in period? He can withdraw either in part or full, of his investment from ELSS but he would have to fore-go the Tax benefits already availed.
Gives Equity Exposure
ELSS funds are invested into giant-cap and large-cap companies. In simple words, this means ELSS funds are invested into companies which are market leaders of Indices. This in turn translates into higher risk as well as returns as compared to other Tax Saving Instruments.
No Capital Gains levied on withdrawal after Lock-in period
Withdrawal after Lock-in period, does not attract any Tax on capital gains. However, it should be noted that ELSS cannot be taken on any family members’ name unlike other Tax Saving Instruments. You can also opt for a Dividend Payout option, thereby realizing some potential gain during the lock-in period, although If you are trying to create wealth over a long term, Dividend Payout is not a good option.
Returns
The last 3 years average returns of ELSS funds have been 27.28%. This is much higher than the returns given by traditional Tax Saving Instruments. However, investing in ELSS funds would be recommended only for those professionals who are willing to take the risk of being exposed to the Equity market.
Conclusion:
Over a long term horizon, ELSS funds are the best Tax Saving Instruments. Also, including ELSS in your financial plan to achieve your long term goals can be considered as a good strategy. However, it should also be noted that ELSS may not be suitable for every working professional since they come with exposure to Equity. For the risk averse, ELSS may seem to be too risky to put their money on.
Although Direct Tax Code (DTC), has excluded ELSS as a Tax Saving Instrument, you would not get a deduction from your income under Sec 66 (which is a replacement of Sec 80C under DTC). It remains to be seen if the Government would keep ELSS as a Tax Saving Instrument in the final version of the DTC. But for working professionals who have a long-term horizon in mind, ELSS funds are the best Tax Saving Instruments, especially for those who are willing to take some additional risk. It also remains to be seen if the Mutual Fund industry can get the Government to include ELSS as a Tax Saving Instrument in the final draft of the DTC.
Written By Arthayantra
