A Guide to Financial Planning for HR Consultancy Owners with Uncertain Cash Flows

I have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 

2. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 

• Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!

• Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.

• Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

3. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.

4. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

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Stop dreaming, start doing…

“A dream is just a dream; a goal is a dream with a plan and a deadline.” – Harvey Mackay

Each one of us has some dreams which we want to achieve. It could be sending your child to one of the   best universities, taking a world tour, giving back to society, etc.  These will remain just wishes unless we articulate them as goals which we would like to achieve. Each of us is in different stages of our lives. Therefore goals and goal priorities will differ based on your age and circumstances. So how does one go about planning for goals?

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What you need to do?

The first thing that you need to do is to know what you want to achieve. For this you need to articulate your goals well. Know your goals. Write them down. Attach time lines to each of them. Know what it will cost you today to achieve them. Apply inflation to it to know what it will cost you in the year your goal will become due.

How you will do go about doing it?

• Priorities: Arrange your goals in the order of your priorities.

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• Review your existing assets and allocate them to your goals: This will help you know how much more you need to invest. In the process of reviewing your existing assets you might want to do away with the assets which have not been performing or correctly understand the reasons for the same. Book losses when required so that you can start fresh new investments.

• Before starting investment know your risk profile. Do not determine the risk appetite based on your need for higher returns. Decide based on a combination of ability and willingness to take risk. If you are an aggressive investor, do not allocate 100% into equity. Similarly, if you are a conservative investor do not just stick to fixed income investments like PPF and Bank FDs. You need to have an asset allocation in place. The basics of investment like diversification and a need for asset allocation will not change whether you are an aggressive or a conservative investor.

• Choice of asset class: Have a mix of debt, equity, real estate and gold in your portfolio. Align your investments in line with your goals. Decide based on how far away you are from your goal. For longer term goals allocate higher proportion to equity and real estate. Having more exposure towards debt and other low risky assets could yield returns which may not be inflation beating. Include equity as it will fetch you higher returns if you stay invested for a longer term. Include fixed income as it will provide you safety. Add a small portion of gold for diversification purposes. For near term goals have higher allocation towards fixed income to avoid adding risk of volatility.

• Choice of product: Within the asset class you can choose products based on your risk appetite and whether the nature of your product matches the nature of your goal. For example you may choose growth option in Mutual funds and cumulative option in FDs in the accumulation stage. On the other hand you may switch to dividend payout options in Mutual Funds and Interest payout options in FDs which will fetch you regular income post retirement. If any product has a lock-in period make sure you allocate money towards it in line with your goals. Keep the liquidity aspect in mind while making choice of product.

If you have not yet planned for your goals, do it now.

“The best time to start was yesterday. The next best time is now.”- Unknown.

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The new retirement choice for NRIs – should you invest?

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With the Reserve Bank of India (RBI) allowing non-resident Indians (NRIs) to invest in the New Pension Scheme (NPS), one more investment avenue has now opened up for NRIs keen to plan for retirement.

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Challenges of retirement planning

NRIs are possibly as guilty as resident Indians of not saving and investing adequately for retirement. Some of them give priority to other goals like children’s education and marriage or infusing funds into their business, to the detriment of a crucial goal like retirement. Many are not conscious of how inflation and galloping medical expenses will cause their monthly expenses to balloon, and hence underestimate the corpus needed for retirement. With human life span increasing, the risk that one may outlive one’s retirement savings has become very real.

NRIs planning to spend their sunset years in India should also factor in the cost of buying a house here, especially of the kind that they would enjoy with respect to facilities and security. Housing prices have risen exponentially in all the major cities over the past decade. Overwhelming reliance on physical assets like gold and real estate, and aversion to equities are other obstacles that NRIs need to overcome to be able to invest effectively for retirement.

Investment options available

Since retirement would be a long term goal for younger NRIs, their investment portfolios should be tilted heavily towards growth assets like equities. Investing directly in equities may be difficult for NRIs, given the challenges of tracking stocks while living in another country. Equity mutual funds are a more suitable option for them. With India having emerged as one of the fastest growing economies in the world, NRIs can expect their equity investments to fetch them good returns.

The balance portion of an NRI portfolio should be filled with debt instruments like debt mutual funds, fixed maturity plans (FMPs), tax free bonds and bank fixed deposits. A small portion may be allocated to gold exchange traded funds (ETFs) for diversification. To this range of options, NRIs may now add NPS.

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Pros and cons of NPS

What works?

The biggest advantage of NPS is its ultra-low fund management fee. By paying a very low fee, the investor gets the benefit of professional fund management. These low charges will boost the long-term returns from NPS.

The biggest advantage of NPS is its ultra-low fund management fee. By paying a very low fee,

NPS also offers equity exposure, albeit only up to 50%. Long-term returns from equities are likely to be higher than if you invest the same money in debt products, considering past data.

NPS also offers equity exposure, albeit only up to 50%.

NPS also allows investors the flexibility to change their allocation to different asset classes (equities, bonds and G-Secs) and to shift between pension fund managers, based on their track record.

NPS also allows investors the flexibility to change their allocation to different asset classes (equities, bonds and G-Secs) and to shift between pension fund managers, based on their track record.

What does not work?

NPS does come with a few drawbacks too. One, it falls under the EET regime, which means that the final corpus gets taxed at the time of withdrawal. Also, you can’t withdraw your funds before reaching 60. If you do so, you will have to use 80% of the corpus to buy an annuity. And even if you withdraw your corpus at 60, you have to compulsorily use 40% of the corpus to buy annuity. Returns from annuities tend to be lower globally.

The final corpus gets taxed at the time of withdrawal. Also, you can’t withdraw your funds before reaching 60. If you do so, you will have to use 80% of the corpus to buy an annuity. And even if you withdraw your corpus at 60, you have to compulsorily use 40% of the corpus to buy annuity.

Make informed choices

You have the choice of an active option or the auto option. Under the first, you can choose your allocation to equities, bonds and government securities, while under the second your investments are put on auto pilot. Under the auto pilot option, initially, your investment is divided in the following proportion: 50% to equities, 30% to bonds and 20% to G-Secs. This allocation remains unchanged until 35. From age 36, the allocation to equities is reduced by two percentage points every year and to bonds by one percentage points, while the exposure to government securities is increased. Thus, the allocation to safer government securities rises as you approach retirement.

You have the choice of an active option or the auto option. Under the first, you can choose your allocation to equities, bonds and government securities, while under the second your investments are put on auto pilot.

NRIs with some knowledge of investing and having a modicum of risk appetite should opt for the Active Choice option. As it is, NPS limits your exposure to equities to just 50%. By adopting the Auto Choice option, you will reduce your exposure to equities even further. Having such low exposure to equities in a long-term goal like retirement is uncalled for, and will affect the size of your final corpus adversely.

If you decide to go with the Active Choice option, the next question is how much you should allocate to equities, bonds and government securities. In our view, given the long-term investment horizon, you should invest in equities up to the maximum permissible limit of 50%. Divide the balance between bonds and government securities. Start reducing your allocation to equities about five years prior to retirement.

If you decide to go with the Active Choice option, the next question is how much you should allocate to equities, bonds and government securities. In our view, given the long-term investment horizon, you should invest in equities up to the maximum permissible limit of 50%. Divide the balance between bonds and government securities. Start reducing your allocation to equities about five years prior to retirement.

Next, how do you go about selecting the fund manager? You are permitted to select only one fund manager for managing all three assets: equities, bonds and government securities. So choose one with a reasonably good track record across all three categories, and review annually.

The opening up of NPS to NRI investment is a welcome development. NRIs should take full advantage of this product while planning their finances for retirement.

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Break your home bias; go global for diversification – article by Vishal Dhawan in Mint

Asset Allocation should also include global stocks and mutual funds as a diversification strategy is always better. Its always good to get the best of all global markets.

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Are you on the path to Financial Freedom?

Independence Day normally involves a short holiday, hosting gatherings or planning outings with friends and family. I’m sure a lot of you are also targeting your own financial independence ? In fact, a very large number of investors whom we work with, when asked about their financial goals, indicate that they would like to achieve financial freedom. When we ask them what financial freedom means to them, their answer is: ‘When we do not have to work for the money and can actively decide how, when, and with whom we choose to associate in our professional life.’

Financial freedom can mean different things to different people. Financial planning allows them to be financially free i.e. decide how they wish to lead their lives. Over my years of running a practice, here are two examples of people we work with, who we believe financial planning has helped achieve the freedom to do what matters most to them.

Dr. Kumar (name changed) is a cardiologist and runs a hospital in suburban Mumbai. Irregular and long work hours mean that there is very little time to spend with his two young kids and his wife. What he really looks forward to, is spending time with his family and enjoying the kids’ growing up and continuing to stay connected with his wife. Booking and planning his holidays each year – one long international holiday, another week to ten day long domestic holiday and some weekend breaks are what he absolutely loves. The finances for these holidays are a part of his financial plan. Whilst there are clearly earmarked long term investment strategies for his longer term goals like retirement and education for the children, there are also separately defined strategies for shorter term holiday goals through the use of financial instruments that can give him the most optimal returns for these goals, on a post tax basis.

Sanjay and Rashmi (names changed) are currently 41 and 39 respectively and they have a young daughter. Sanjay runs a small sized family business and Rashmi works with a chartered accountancy firm. When most couples are just about beginning to save for their financial goals, and are looking to save for their retirement and childrens’ future, both Sanjay and Rashmi have already achieved their financial goals i.e. even if they do not save any monies from here onwards, and let their existing portfolio grow, they should be achieve their financial goals. This has been possible through a combination of a conservative lifestyle with controlled expenses, a savings rate in excess of 40% of total income, controlled use of leverage on a home loan that has been prepaid aggressively, and a diversified portfolio across equities, fixed income, real estate and gold, that is rebalanced regularly.

Just like India has had many historic events which finally helped us achieve freedom, your path to achieving your financial freedom will be a long-term process, wherein there will be struggles

and various factors which you will be unable to control. However, staying on the path to financial freedom for yourself and your family is the key to pursue your dreams.

Happy Independence Day!

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Financial Resolutions for New Fiscal – Article by Vishal Dhawan in TOI

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Go – reach for the skies

When I was growing up, life was quite simple. Most children were bunched into three categories – aspiring doctors, aspiring engineers and others. I remember a blockbuster Bollywood movie a couple of years ago, where the father picks up his new born and gleefully says ”My son will be an engineer.” Times have changed, and as a part of building financial plans now, we meet a whole set of parents who very happily state that have no idea what their kids will be when they grow up, they will be happy with whatever they do, and they want to provide for it.

So what should be your financial plan as a parent if you really want your child to follow his or her heart? For example, if one’s child wants to do a professional education in India or overseas, how can a parent prepare himself financially to support the child’s dream without compromising on other financial goals like retirement, etc. Most parents are aware of children’s education plans, education loans, etc. However, the element of planning gets missed out very often.

 Step 1: Define the current cost:

Get a fair estimation cost for the professional program that you would like to plan for. This is hard, especially if you do not know which program to plan for as these would vary depending on choice of country, type of program, duration of program. Do remember to take all costs into consideration and not only tuition fees. You may be forced to plan for a higher amount, due to not knowing which program will finally be chosen

Step 2: Estimate the corpus required:

Considering that education inflation in both India and overseas tends to be higher than regular consumer price inflation, you would need to factor in the inflated cost of education by the time you need the corpus. To give you a perspective, a domestic education costing Rs 10 lakhs today would cost close to Rs 32 lakhs after 12 years at an inflation rate of 10% pa. Similarly, an overseas education costing USD 100000 today ie approximately 60 lakhs, would cost in excess of Rs 1.2 crores after 12 years at an inflation rate of 6%p.a..

Step 3: Systematically save monthly or annually:

Break up the target corpus into a monthly or yearly saving goal, so that it can be easily measured. For example, at a rate of return of 12% p.a., one would need to save approx Rs 10000 per month and Rs 38000 per month to achieve the goal of planning for the domestic and international corpus respectively.

Step 4: Choose the appropriate vehicle:

The vehicle to use to reach the targeted corpus would be a function of the amount of money that you can put away. For example, if you can invest only Rs 8,000 per month to save towards the domestic education goal, you will need to target a higher rate of return on the portfolio. Therefore, you will need to use products that have a large equity exposure.

Step 5: Monitor progress:

It is critical to monitor progress annually to ensure that the assumptions made and the actual output are in line, to avoid any nasty surprises at the finish line.

Help your children reach for the sky.. bit by bit.

 Vishal Dhawan is a financial planner by profession and founder of Plan Ahead Wealth Advisors Pvt. Ltd. He can be reached at vishal.dhawan@planahead.in

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Do NRIs need a Financial Plan

From our experience of interactions with nonresident investors, we have found that a significant number of investments by NRIs tend to be made during their short visits to India.

During that period, when they visit their bank or speak to relatives/ friends, they get a broad view on what is happening to various asset classes – be it real estate, stock markets, or bank deposit interest rates. Between the various social obligations, time with family, and other things to do in their action packed agenda, quick investment decisions tend to be made, a large number of which tend to be long term commitments through investments in long term insurance policies/ real estate investments. Unfortunately, a large number of these investment decisions are not necessarily aligned to long term financial goals of the NRI and his family. Once NRIs return back to their home overseas, they then tend to wonder if it was the right investment decision or whether haste made waste, especially as they now get time to think about it. They wonder whether these investments fit in case they wish to return to India at a latter point in their lives or in case they wish to use these investments for children’s education or their own retirement, or to support their family members back in India.

In addition to the alignment to financial goals for self and family, it is critical to ensure that the investment products chosen allow non residents to invest in them, the repatriation restrictions (if any) on the principal amount and the gains, as well as the taxation of the gains in both India as well as the overseas location of the NRI. A lot of these answers can only be obtained when there is clarity in terms of what role the investment is expected to play for the NRI in his portfolio.

It is therefore critical to ensure that the focus on working to a financial plan is given the same degree of importance, irrespective of whether the individual is a resident or a non resident. In fact, working to a plan tends to be even more critical for a non resident than a resident, due to a legacy holdings and finances that they may have from their days in India.

A very large number of NRIs tend to leave India during a phase of their life when they have already begun their financial life – they have probably opened regular savings bank accounts in their names, bought investment products like stocks/mutual funds/insurance products/PPF accounts, or even made a real estate investment. Since there is a tendency to leave India on an overseas assignment/project, a higher education and then decide to settle down overseas, the starting point for a financial plan is to get your existing portfolio of investments in order.

 

The following steps need to be taken to ensure that the existing finances are aligned to the needs of a non resident

1. Close all resident bank accounts or convert them to nonresident ordinary (NRO) accounts. These NRO accounts can be used to credit amounts from investments that may have been made earlier, for example, dividends from stocks, rental income, amongst others.

2. Ensure that the tax returns in India have been filed. Whilst filing a tax return is not mandatory if the income is less than the taxable limit, it is important to be sure that the total income is less than the taxable limit.

3. Review your demat accounts so that they can be converted to nonresident demat accounts.

4. Change your mutual fund portfolios (if any) to a non resident status and link your NRO bank accounts to these investments.

Once the legacy portfolio of investments have been put into order, it is crucial to begin the process of setting up your financial goals through a financial plan. Whilst a financial plan may sound rather complex, it is simply a roadmap that allows you to think about what you want to achieve with your life goals and how your finances will allow you to get there.

Let me illustrate this with an example. Let’s say one of your life goals is to have your child study at a particular post graduate program. How would you design your financial plan towards this life goal?

1. Establish the current cost of the education that you want to plan for – The costs for higher education vary significantly depending on the type of college, country of education, type of program and number of years of education. The total costs of education should be established including the costs of living and travel and not just education costs.

2. Understand the impact of inflation on current costs – Inflation rates on education may vary significantly depending on whether you wish to plan an education in India or overseas. You need to establish the corpus required for the education after adjusting for inflation.

3. Choose the appropriate asset mix to achieve your target – It is critical to establish the right balance of stocks and fixed income exposure so that you understand the returns and associated risks that you will take on the portfolio in order to reach your target.

4. Choose the appropriate product/products to achieve this targeted amount – Once the above steps have been undertaken, you can move to the product selection stage where you can look at the merits/demerits of using deposits, mutual funds, insurance plans , stocks or other options to achieve your target.

5. Evaluate the progress towards your goal at regular intervals – It is important to review the progress of your financial plan to ensure that you are on track to achieve your financial goals. However, it is important that you give your products adequate time to deliver as per their designed objectives. A review once a year should be adequate.

A financial plan can be developed for all your life goals accordingly. You may need to take the help of a financial planner to integrate all your goals into a plan so that your overall finances can be aligned to all your goals. For example, your retirement plan could vary depending on whether you wish to finally settle down in India or continue to live overseas once you retire.

In addition to each of planning for your financial goals, you need your financial plan to cover:

1. Taxation of these investments in your home country – Tax treatment of investment products in the home country may be different from those in India. For example whilst there is no long term capital gains tax on equities or equity mutual funds in India, capital gains tax may be chargeable on these investments in the country that you live in. It is therefore critical to understand the tax implications at both levels as a part of your financial plan. You may need to seek the help of a tax advisor in both India and your home country, so that there is complete clarity on the same. In addition, there may be double tax avoidance treaties in place that allow you to set off the taxes you pay at in one country against taxes due in India, so that you are not taxed twice on the same amount. Your tax advisor should be able to help you on this.

2. Succession planning – Inheritance laws tend to vary from country to country. In addition, whilst India does not currently have any estate duties and taxes, a large number of countries have an inheritance tax. Since you could end up inheriting assets from your parents/ other family members and also having your assets transferred to your family members on death, it is critical to ensure that succession planning documents like wills are created keeping the inheritance laws of both countries in mind.

Once you are clear about your financial goals, taxation and succession laws, you will be in a position to pick your investment products far more easily and can focus on tracking how your investment products are taking you closer to your financial goals.

 

This article was written by Vishal Dhawan, CFP^CM 

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What does financial freedom mean?

Independence and freedom are amongst the most inspirational words in the English dictionary in my opinion. They evoke a sense of hope, inspiration, choice and joy all at the same time, and could mean very different things to different people.  For example, a very large number of investors whom I work with, when asked about their financial goals, indicate that they would like to achieve financial freedom. When I ask them what financial freedom means to them, their answer is: When I do not have to work for the money and can actively decide how, when, and with whom I choose to associate in my professional life.

Financial freedom can mean different things to different people. Financial planning allows them to be financially free i.e. decide how they wish to lead their lives. Over my years of running a practice, here are two examples of people I work with, who we believe financial planning has helped achieve the freedom to do what matters most to them.

Dr. Kumar (name changed) is a cardiologist and runs a hospital in suburban Mumbai. Irregular and long work hours mean that there is very little time to spend with his two young kids and his wife. What he really looks forward to, is spending time with his family and enjoying the kids’ growing up and continuing to stay connected with his wife. Booking and planning his holidays each year – one long international holiday, another week to ten day long domestic holiday and some weekend breaks are what he absolutely loves. The finances for these holidays are a part of his financial plan. Whilst there are clearly earmarked long term investment strategies for his longer term goals like retirement and education for the children, there are also separately defined strategies for shorter term holiday goals through the use of financial instruments that can give him the most optimal returns for these goals, on a post tax basis. Debt mutual funds of varying maturities can be used very efficiently for shorter term returns.

Sanjay and Rashmi (names changed) are currently 39 and 37 respectively and they have a daughter who is 6 years old. Sanjay runs a small sized family business and Rashmi works with a chartered accountancy firm. When most couples are just about beginning to save for their financial goals, and are looking to save for their retirement and childrens future, both Sanjay and Rashmi have already achieved their financial goals ie even if they do not save any monies from here onwards, and let their existing portfolio grow, they will be achieve their financial goals. This has been possible through a combination of a conservative lifestyle with controlled expenses, a savings rate in excess of 40% of total income, controlled use of leverage on a home loan that has been prepaid aggressively, and a diversified portfolio across equities, fixed income, real estate and gold, that is rebalanced regulary.

So what does financial freedom mean for you? Choose your financial freedom the way you want it.

This article was written by Vishal Dhawan, CFP^CM 

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Budget 2012 – What’s in it for you!

Whilst the expectations from the budget were low, many of us were hoping that the budget would try to push the envelope since it was the last real opportunity for the UPA government to push through reforms. However, it seems like the government did not try to do anything dramatic, lest Mamta insists that the Finance Minister should resign, along with the rail minister.  So we will celebrate Sachin’s 100^th 100 today instead of the budget.

The early assessment of the budget and what’s in it for you:

Your Income

• Gender equality is one step closer in India, at least as far as tax laws are concerned. The minimum  tax exempt income slab is now Rs. 2 lakhs for both men and women.
• The Direct Tax Code (DTC) has been deferred. There has been a marginal tinkering with the tax slabs, with income upto Rs. 2 lakhs  being exempt. For the Rs. 2 – 5 lakhs slab, tax rate is 10%, and 20% for the next slab of Rs. 5 – 10 lakhs. The highest tax slab now starting at an income above Rs. 10 lakhs is to be taxed at 30%. Whilst this is clearly not a significant rationalization in the taxation rates on personal taxes,  it aligns it with the proposed DTC so we are hopefully a step closer to the DTC.
• For anyone in the highest tax bracket (earning above Rs 10 lakhs), expect a saving of Rs. 22600.  It is important to ensure that you put this saving to good use i.e. to your highest priority financial goal.
• Exemption of an amount of Rs. 10000 for interest earned on savings accounts. In addition to some marginal savings, the biggest advantage is probably the administrative ease that comes with knowing that if you manage your savings account without excessive balances, you are saved from running around to collect your interest certificates for savings accounts at the end of the year from multiple banks.

Your Expenses

• If you have a marriage coming up soon, be ready to pay more for gold and silver. Customs duties on gold and silver have both been hiked.
• Cars will become more expensive with an excise duty hike, and yes, it does not matter whether the car runs on diesel or petrol, for now.
•  Expect prices of consumer durables to go up – TV, Acs, refrigerators, washing machines and microwave ovens could be 2-4% more expensive.
• Expect to pay more for most services for e.g. telephones, as service tax has been raised from 10% to 12% and most services except 17 are now covered under the ambit of service tax.
• You  can expect a deduction of Rs. 5000 for a preventive health checkup
• Expect inflation to creep up once again as the government continues its borrowing program unabated – plans to raise a gross borrowing of Rs 5.7 lakh crores this year. Interest rates may therefore not come down as quickly as a lot of people expected.

Your Assets and Liabilities

Equity Assets

•  Another new program named after Rajiv Gandhi ( no one wonders why?) allows retail investors with income upto Rs. 10 lakhs to get a 50% tax deduction on investments in equities upto Rs. 50000, with a 3 year lock in. This should help in increasing retail participation in equity markets to a certain extent.
•  While equity markets may be driven in the short term by reactions to the budget , we believe that the markets  will ultimately be driven by global oil prices and liquidity flows from overseas. The markets are already pricing in a large portion of concerns like input cost inflation and higher interest rates. Since valuations are currently still attractive, look at enhancing equity exposures on declines vis a vis your overall asset allocation strategy. Expect returns to be in line with long term corporate earnings growth of 15-20% per annum over the next 3 years.  A key factor to watch out for will be tensions in the Middle East, which can take oil prices higher.
•  The Securities Transaction Tax (STT) has got lowered by 20% which may be marginally beneficial for investors.

Fixed Income Assets

•  The expected government borrowing numbers and slippages on the fiscal deficit front are negative for long term yields and bonds. We therefore believe it is prudent to remain at the shorter end of the yield curve i.e. in the 1-3 year product , with a 6 to 9 month view.  The use of short term bonds funds and Fixed Maturity Plans ( FMPs) is recommended.
•  Enhancements in tax free bond limits like NHAI, HUDCO, IRFC will probably result in more issuances in this space, which should be good for investors in the highest tax bracket.
•  With Qualified FIIs allowed to access corporate bond markets, that should result in increased liquidity in corporate bond markets over a period of time.
•  You could expect to pay more for insurance policies as well due to service tax increases.

Real Estate Assets

•  Tax deduction at source has been introduced on sale of real estate ( except agricultural land) at the rate of 1% with effect from Oct 1, 2012. This applies to all transactions above Rs. 50 lakhs in specified urban areas and Rs. 20 lakhs in other areas. Since property registration will not be permitted without proof of deduction and payment of this TDS, it could increase paperwork.

Loans and Liabilities

•  With interest rates likely to come down slowly due to inflationary concerns and high government borrowing, prepaying your loans may continue to be an important component of managing your finances. Of course, if you have a cheap fixed rate loan, you can let it be as is.

Author – Vishal Dhawan, CFP ^CM

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