When Opportunity Knocks, Open The Door!

While it is essential to have a considered asset allocation model as part of your long-term investment plan, the model must also be flexible enough to account for changes in the evolving situation of the economy and budgetary policies. Here’s a look at the investment options that you can benefit from in the current fiscal.

• ELSS can continue to be a part of your portfolio plan for the next financial year, since the Direct Tax Code (DTC) is going to be implemented from April 2013.
• The Union Budget 2012 has introduced the Rajiv Gandhi Equity Savings Scheme, which would allow first time investors an income tax deduction of 50 per cent for investments of up to Rs 50000 in direct equities.
• Fixed Maturity Plans (FMPs) will continue to remain an attractive option for those who are sure about their time horizon. Remember that FMPs are much more tax efficient than traditional investment options like fixed deposits and bonds.

Investing to achieve different goals over different time periods is a process that requires an investor to have an investment plan and a strategy to implement it effectively. An asset allocation strategy can ensure that one’s investments remain on track over different time periods.

While sticking to a carefully designed asset allocation model helps in avoiding any haphazard decisions, realigning your portfolio within an asset class to benefit from opportunities provided by factors such as the emerging interest rate scenario, changes in tax laws, regulations as well as announcements made in the Union Budget can make a huge difference to the portfolio returns. Therefore, as an investor, you must keep an eye on these changes and have enough flexibility in your portfolio composition to benefit from them.

Here are some of the opportunities that you must consider while making investment decisions during the current financial year:

Continue To Invest In ELSS

Since the Direct Tax Code (DTC) is going to be implemented from April 2013, Equity Linked Savings Schemes (ELSS) will continue to exist for one more year. Hence, let ELSS be a part of your tax planning. If you are a first time investor, investing through SIPs would be an ideal option for you.

Rajiv Gandhi Equity Savings Scheme

If your annual income is less than Rs 10 lakh and you are open to taking the plunge into the stock market for the first time, you can opt for the Rajiv Gandhi Equity Savings Scheme (RGESS) that has been introduced in the Union Budget 2012. The scheme would allow for income tax deduction of 50 per cent for investments of up to Rs 50000 in direct equities. Being a tax saving instrument, it will have a lock-in period of three years. Needless to say, you will have to be careful about the stock selection. Once the details are out, it would be easier to work out a strategy to invest through this scheme.

Tax Free Infrastructure Bonds

During the last financial year, i.e. 2011-12, tax free infrastructure bonds provided an excellent long-term investment opportunity for investors. These bonds were issued for tenures of 10 and 15 years. Moreover, the high interest rate regime also ensured attractive tax free annualised returns in the range of 8-8.35 per cent.

These bonds scored high on safety, predictability of returns and liquidity through listing on the stock exchanges. Besides, it was a real bonanza to be able to invest in debt instruments for such a long-term period without having to worry about the implications of interest rate movements on your investments. It is important to know that these bonds are different from infrastructure bonds that entitled you for a tax benefit of Rs 20000 under Section 80CCF.

In the Union Budget 2012, the Finance Minister has doubled the target for these bonds to Rs 60000 crore. Therefore, make sure that these bonds remain in the contention for long-term allocation to debt instruments in your portfolio. Considering the emerging interest rate scenario, it is quite likely that these bonds will offer lower returns than those offered last year. However, for investors in the higher tax brackets, these bonds will continue to remain quite attractive as the returns are tax free.

FMPs And Short-Term Bond Funds

With a fiscal deficit of 5.90 per cent for the current financial year and a projected deficit of 5.19 per cent for the next financial year, it is highly unlikely that the RBI will go in for aggressive rate cuts. In a situation like this, Fixed Maturity Plans (FMPs) will continue to remain an attractive option for those who are sure about their time horizon. Remember that FMPs are much more tax efficient than traditional investment options like fixed deposits and bonds.

However, if you are not in a position to lock your money in for a fixed period, as required by FMPs, ultra short-term bond funds as well as short-term bond funds are good options to consider for higher and tax efficient returns as compared to traditional investment options.

Those investors who have been thinking of investing in income funds to take advantage of a reversal in the interest rate cycle should note that the risk-return matrix has turned unfavourable for the short term.

Hemant Rustagi
CEO, Wiseinvest Advisors