Another Union Budget has come and gone. Budget 2012-13, expected to be a make or break one for the UPA government, turned out to be lacklustre. Some reforms, such as the Direct Taxes Code (DTC) and introduction of an integrated goods and services tax, remain on the backburner.
While the concessions on personal income tax are disappointing, an increase in service tax from 10 per cent to 12 per cent will make eating out, air travel and availing professional services costlier. Besides, there is no mention of infrastructure bonds under Section 80CCF in the Budget. It seems investors are set to lose tax benefit on investment up to Rs 20,000 in these bonds.
However, the key question on every investor’s mind is how Union Budget 2012-13 impacts my investment options. Here is how the Budget would impact your investment in the two most important asset classes — equity and debt.
Equity investments
Since the DTC is not being implemented from April 1, 2012, you can continue to invest in equity-linked savings schemes (ELSS). Those of you who have already signed up for a systematic investment plan beyond March 2012 in an ELSS can breathe easy and continue your investment process.
The Budget has reduced the securities transaction tax from 0.125 per cent to 0.1 per cent on cash delivery transactions. Although this reduction is not on expected lines, it will reduce transaction cost.
For those with annual income of less than Rs 10 lakh and looking to invest in the stock market for the first time, the Budget has introduced the Rajiv Gandhi Equity Savings Scheme. The scheme would allow for income tax deduction of 50 per cent for investment up to Rs 50,000 in direct equities. It will have a lock-in period of three years.
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While the intent here is to increase retail participation in the stock market, a direct exposure to equities is likely to expose first-time investors to higher risk, as compared to investing in a collective investment vehicle like mutual funds. Notwithstanding the operational hassles, the challenge would to get the right advice for investing smaller sums.
Hence, without deviating from the earlier accepted stance of encouraging investors to participate in equity markets through mutual funds, this tax benefit should also be extended to investments in equity funds. It will benefit investors in more than one way. For example, a lock-in period of three years either in case of wrong selection of stocks or a segment/sector not doing well can be risky. On the other hand, in a mutual fund scheme, while the lock-in period prohibits investors from making any transaction, the fund manager retains the flexibility to make changes in the portfolio as and when required.
Debt and debt-oriented investments
With fiscal deficit of 5.9 per cent for the current financial year and an estimated 5.1 per cent for the next financial year, there is bound to be pressure on the yield curve. The yield on the benchmark 10-year bonds moved up 0.09 per cent on the Budget day. The benchmark yield is likely to trade between 8.3 per cent and 8.6 per cent over the next quarter or two.
Given the scenario, if you are sure about your time horizon and are looking to invest in a tax-efficient investment option, fixed maturity plans will continue to remain attractive. Ultra short-term debt and short-term debt funds will continue to give healthy returns. In case you have been thinking of investing in income funds to take advantage of reversal in the interest rate cycle, the risk-return matrix has turned unfavourable in the short term. However, if you do not mind having some exposure to equity in order to get better returns than pure debt and debt-oriented funds, monthly income plans will be a good option for at least a one-two year time horizon.
The Budget has doubled the limit for tax-free infrastructure bonds to Rs 60,000 crore. These will provide you a good investment opportunity, especially if you intend to invest for the long term.
Last but not the least, don’t allow an annual event like the Budget to impact your long-term investment process. While your short-term and medium-term investments in debt instruments might require some realignment, equities have the ability to withstand short term turmoil and perform better than other asset classes in the long run.
The writer is CEO, Wiseinvest Advisors