Personal finance resolutions for FY 2022-2023
The last two years saw a lot of turbulence in the personal finance and investment space. Covid triggered stock market crash followed by a quick recovery and again followed by a small correction, high inflation, low interest rates, and the ongoing Geo -political crisis due to the Russia-Ukraine war.
Today as we step into the new financial year 2022-2023, some of these issues like the pandemic are hopefully done with, while the others and the associated uncertainty gets carried over .
So here is a quick checklist of how to protect your portfolio from a sharp downside in the event of such a crisis and some resolutions one can make for the financial year ahead .
- The key to protect your portfolio from too much downside risk is efficient diversification. Not all asset classes move in tandem.Equity and debt are not co-related, while gold has a negative co-relation to equity. Among all these, equity is the most volatile. And if one invests in equity with a long term perspective and adopts the monthly SIP route, such interim volatility will not affect you much as your investments will benefit from the cost averaging even when the markets are in a down run. To give you an example of my own personal portfolio – which is broadly something like 50 % debt ( Fixed Income and debt funds), 40 % equity and 10 % gold) , during the sharp stock market fall during March/April 2020, most equity funds/indices fell by close to 30 % , but since most of them were via the SIP route, the correction was less, and the subsequent installments over the next year reduced the avg purchase NAV , and the same funds which were in RED saw a huge profit when the markets recovered. The fixed income part did not get affected. The crisis saw 3-4 interest rate cuts which benefit the debt funds – most of the ones I had gave something like 9-10 % returns in that year.. And gold shone and reached an all time high. So, the net result was that my portfolio was hardly affected over the time frame of that one year. So, resolution 1 would be to optimally diversify your investment portfolio to maximize the risk adjusted returns.
- Tax optimization on your investments- One of the major objectives of the mass affluent salaried individual in India is to reduce taxes on the active income. Unfortunately you can do it only to a certain extent- we are a country with a progressive taxation policy. So the more you earn, the higher you pay in both absolute terms and percentage terms. But many of us remember to make these tax saving investments at the fag end of the year, when we are reminded by our employer to submit proof of investments for income tax rebate. And in a hurry to finish doing these investments we fall prey to the LIC /other Insurance agents trying to sell low yielding savings cum Insurance plans..and they are more than eager to get everything done for you at a short notice at your doorstep. So resolution 2 would be to plan ahead right at the start of the financial year – if you wish to invest in PPF for 80C rebate, try and do it in April , the first month of the financial year so that your money earns interest for the whole year.. If you follow this process for the entire PPF term, it will make a significant difference to your maturity corpus. In case of equity oriented /NAV based products like ELSS mutual funds and NPS, invest monthly instead of a lump sum so as to spread the risk. You can set up an auto debit for the required amount from your saving account. Apart from this, also look at minimizing the tax impact on your investment income- invest in high growth lower tax product like equity funds, and in lower risk debt funds to benefit from indexation.
- Always work with a plan in place. Have clear goals for all the financial milestones incl retirement , and make sure you align your investments to these goals. At the end of every year, see if you are on track as as far as reaching your goals are concerned. As your salary and income surplus grows, step up your investments every year. Do not keep idle cash at 2 % in your savings bank account. A penny saved is a penny earned.
Good luck for the year ahead !
7.75 % savings (taxable) Bonds to be launched in a new avatar from 1 July 2020
The popular 7.75 % savings bonds, which were also known as GOI bonds or RBI bonds were withdrawn for subscription last month w.e.f 29 May 2020.
Come 1st July, the bonds are being re introduced in an entirely new avatar and will be called Floating Rate Savings Bonds 2020 (taxable).
Here are some of its main features –
- Any Indian resident can invest as an individual or as joint/either or survivor /minor with guardian. HUFs can invest too.
- These bonds will be issued only in electronic form and held in an account called the bond ledger account ( BLA) for the investor.
- These bonds are not transferable, except transfer to nominee or legal heir in the event of death of the investor.
- The coupon rate will be floating and pegged at the National Savings Certificate (NSC) rate + 0.35 %. It will be revised every 6 months on Jan 1 and July 1
- Coupon rate for the first subscription opening on July 1 2020 will be 7.15 % ( 6.80% + 0.35%)
- One can subscribe to these bonds through cheques/drafts/electronic mode and cash (only upto Rs 20,000)
Declining interest rates and alternate investment options
Interest rates in India were on a steady decline for the last few years and the demonetization of 500 and 1000 rupee notes has just accelerated the process. Many banks like ICICI Bank, HDFC Bank, Canara bank have announced a rate cut (ranging from 10 bps -0.10 % to 50 bps -0.50 % depending upon the tenure of the fixed deposit) with immediate effect, all other banks too will follow suit soon. Even AA+ rated companies like Mahindra and Mahindra Finance, Dewan Housing Finance, Shriram Transport Finance have cut their deposit rates.
This was long overdue; as India is one of the very few developing economies with such high interest rates and sooner or later they would have had to align with the global rates and lower interest rates will also stimulate economic growth. While all this is theoretically logical, fixed income investors especially retirees who are dependent on the interest for their regular expenses now face a practical problem – where to invest so as to get a reasonable amount of fixed income assuming low risk on principal? India does not have a social security system like the developed countries do which makes it all the more important to explore alternate low risk investment options .
- Company fixed deposits – Though they have higher interest rates varying from 50 bps to 200/300 bps higher than standard bank deposits, people are not comfortable putting in their money as the general perception is that it is risky as they are unsecured. True, they are riskier than bank fixed deposits, but AA+ rated plus deposits rate high on safety and can be considered. Moreover, there is no guarantee than banks cannot go bust. And DICGC – The deposit Insurance and credit guarantee corporation guarantees only up to 1 lakh bank deposit per client, so anything above that is unsecured.
- Senior Citizen’s Savings Scheme (SCSS) is one of the most attractive options for the retired. Up to 15 Lakhs per account above age 60, and the current interest rate is 8.6 % pa fully taxable for the financial year 2016-2017. The tenure is 5 years and the scheme carries the highest safety.
- Tax free Bonds – These too carry sovereign risk- highest safety. The coupon rate is usually lower than that of fixed deposits, but for those in the highest tax bracket, the effective returns is higher than the post -tax returns of the taxable fixed deposits. The main disadvantage is the high lock in period – 10/15/20 years. These bonds are trade able in the secondary market; but how soon it can be liquidated in case of emergency depends on the trading frequency and volume. Another disadvantage is that they offer only annual interest under the non -cumulative option hence may not suit those who are looking for regular income. There are very few new issues coming out in the market, but one can always buy the existing ones being traded at the ongoing bond prices.
- Debt schemes of mutual funds – These don’t guarantee a fixed return, but score over fixed deposits in terms of tax efficiency for those taxed at the highest slab. These are liquid, can be withdrawn anytime and have monthly, quarterly and half yearly dividend payout options too, but the amount of dividend paid is variable, not a regular fixed amount.
- Government of India 8 % taxable bonds – These bonds were not a favorite till recently, since long term fixed deposits paid more than this, and with the interest being taxable like FD interest, there was no clear advantage of investing in these. But now with the fixed deposit rates having reduced drastically, one could consider this. But only half yearly option is available in non-cumulative category which may not suit those wanting regular monthly income.
- Post office Monthly Income Option – This is an evergreen product suitable to senior citizens with low risk appetite. The interest is payable monthly and the current rate is 7.7 % pa , and one can invest up to 4.5 lakhs in single name and up to 9 lakhs jointly. The tenure is 6 years (premature withdrawal facility is available after one year with some deductions). This product has an attractive feature – a bonus of 5 % on the principal which is paid if the deposit is held till maturity, i.e 6 years. The disadvantage of this product is that it is fully taxable, making the returns almost comparable to fixed deposits, which is why it is the last one on the list.
Dealing with your equity portfolio in the current market fall
The Indian stock markets are in a downtrend since November 8, with the BSE Sensex losing close to 1500 points since then. It is common knowledge that the key triggers causing this uncertainty and volatility are the Prime Minister’s demonetization announcement, followed by Trump’s victory in the U.S presidential elections. Though market pundits feel that this is just a short term trend and the initial reaction to the sudden news, it is hard to predict the market trend in the medium term.
So how does the common man/investor deal with the equity part of his investments in the current scenario?
- Direct Equity/ Investment in shares – If you have a well-diversified portfolio of stocks which has been picked based on sound fundamentals and professional guidance, relax! However tempting it may be to sell/book some profits when you see the prices fall a bit every day, do not panic. Stick to your long term strategy and the investment time frame. And for those who have a dormant portfolio equity portfolio invested long time back and not actively monitored, the earlier they sit up and take stock, the better. Irrespective of how the market is doing.
- Equity Mutual Funds – SIP investments work on the rupee cost averaging concept, so are not affected by market ups and downs .(see https://srirakshafp.com/2012/03/27/understanding-the-rupee-cost-averaging-concept/) . Lump sum equity investments should be given a time frame of at least 3 to 5 years to deliver the target returns. Those who have held on to their investments have benefited much more than those who have acted on impulse and tried to en cash their investments to salvage the remaining profits.
Here is how diversified equity funds have fared over the long term
|Category||3 years return (%) *||5 years return (%)*||10 years return (%)*|
|Pure Large Cap funds||19.84||15.95||10.92|
|Pure Mid cap Funds||35.9||23.58||16.02|
|Value Style Funds||27.78||20.31||15.32|
|Hybrid/Flex i cap funds||22.70||17.00||13.49|
*Average returns of the category per annum. Source – Bajaj Capital.com
This clearly shows that irrespective of the time of entry and the intermittent volatility those investors who have held on to their investments have never regretted.
- If you need cash or were planning to book profits – A falling market is surely not a good time to sell stocks especially to meet unanticipated expenses; which is why any competent financial planner or advisor will always advise his clients to have some cash in the portfolio for emergencies. And if you plan to redeem because the investment has generated the target return, do go ahead. Always stick to the investment strategy and financial goal.
- If you have cash to invest in equity – Thanks to the one week slide in the market, almost all the blue chip stocks are now available at a discount. Don’t miss this opportunity to buy fundamentally strong stocks at a bargain. A word of caution – do not get lured into investing in stocks which have corrected the most-that could also be because the business model isn’t strong enough or due to some adverse news or development in the company.
Have the tax incentives made the NPS attractive for investment?
The National Pension Scheme or NPS which was launched on 1 May 2009 was a major move by the government to convert the pension system from a defined benefit scheme to a more flexible defined contribution scheme with a range of investment options for the investors. But even after more than five years since it started, despite the government’s backing and low charges, it is yet to take off as a popular tool to save for retirement. This could be attributed to firstly the difficulties faced in opening the account – in post offices and the specified banks, where many times the employees themselves are not aware of the product and secondly the product limitations.
Why it is important to read the fine print
We live in an era where almost every product is sold using aggressive marketing techniques. Most products in the finance domain- credit cards, loans, bank account, real estate are advertised using eye catching colorful images and bold text. And using fine print has become a common method of advertising – all the positives and attractive features of the product on offer are highlighted in bold and the accompanying conditions, restrictive clauses and “not so attractive” features which could influence the prospective client to re-consider his buy decision are very carefully tucked away in small or fine print somewhere at the bottom part of the page or the last page.
Avoiding money conflicts in your relationships
“ Money may not buy love, but fighting about it will bankrupt your relationship”
This is a quote from an unknown author, but very apt in the current scenario.