.

Financial planning in
new year: Start it now
Dont tinker with your long-term investment plan. But it is always better to make some
critical changes, based on new tax laws and instruments

TEPID PERFORMANCE
OF MUTUAL FUNDS
Fund category

Return- 1 yr (%)

Debt: Credit opportunities 8.89

Debt: Ultra short-term
8.12
Debt: Liquid
7.85
Debt: Short-term
7.75
Gold funds
7.63
Hybrid: Arbitrage
6.93
Debt: Income
6.87
Debt: Dynamic
6.46
Equity: Small-cap
-2.52
Equity: Mid cap
-4.63
Equity: Tax planning
-6.00
Equity: Multi-cap
-6.25
Equity: Large cap
-7.96
Data as on March 31, 2016
Source: Value Research

ILLUSTRATION: BINAY SINHA

SANJAY KUMAR SINGH

he start of a new financial year

is a good time to review your
financial plan and take stock of
where you stand in relation to your
goals. If new goals have emerged, this
is the time to make fresh investments
for these. While having a steady
approach is a virtue here, make some
adjustments in the light of developments that have occurred over the
past year.

Equity funds
Large-cap funds have fared worse
than mid-cap and small-cap ones over
the past one year (see table). Over this
period at least, the conventional wisdom that large-cap funds tend to be
more resilient than mid-cap and
small-cap ones in a declining market
was overturned. Nilesh Shah, managing director, Kotak Mahindra AMC,
offers three reasons. For the bulk of
the previous year, FIIs were sellers of
large-cap stocks, whereas domestic
institutional investors (DIIs) were buyers of mid- and small-caps. Large-cap
stocks are also more linked to global
sectors like metal and oil, whereas
mid- and small-caps are linked to
domestic sectors. The latter has done
better than the former, leading to
stronger performance by mid- and
small-cap stocks. Large-cap stocks
earning growth decelerated or
remained subdued throughout last
year while mid- and small-caps delivered better growth, he says.
Despite last years anomalous performance, investors should continue
to have the bulk of their core portfolio,
70-75 per cent, in large-cap funds for
stability, and only 20-25 per cent in
mid-cap and small-cap funds. Largecaps could also fare better in the near
future. Says Ashish Shankar, head of
investment advisory, Motilal Oswal
Private Wealth Management: IT,
pharma and private banks, whose
earnings have been growing, will continue to do so. Public sector banks and
commodity companies, whose earn-

ings have been bleeding, will not bleed

as much. Many might even turn profitable. FII flows turned positive this
month and FIIs prefer large-caps.
With the US Fed saying it wont hike
interest rates aggressively, global liquidity should improve. If FII flows
continue to be stable, large-caps
should do better. Valuations of largecaps are also more attractive.
Debt funds
Among debt funds, the category average return of income funds and
dynamic bond funds was lower than
that of short-term, ultra short-term and
liquid funds (see table). Explains Shah:
Last year, while Reserve Bank of India
(RBI) cut policy rates, market yields
didnt soften as much. The yield curve
became steeper. The short end of the
curve came down more than the long
end, which is why shorter-term bonds
did better than longer-term gilts.
Stick to funds that invest in highquality debt paper, in view of the worsening credit environment. Shankar
suggests investing in triple A corporate bond funds. Today, you can
build a triple A corporate bond portfolio with an expected return of 8.5
per cent. Many of these have expense
ratios of 40-50 basis points, so you
can expect annual return of around
eight per cent. If bond yields come
down, you could end up with returns
of 8.5-9 per cent. If you redeem in
April 2019, you will get three indexation benefits, lowering the tax incidence considerably. Investors who
have invested in dynamic bond funds
should hold on to these. A rate cut is
expected in April. Yields will drop and
there may be a rally in the bond market, says Arvind Rao, Certified
Financial Planner (CFP), Arvind Rao
Associates.
Traditional fixed income
The recent cut in small savings has
jolted conservative investors. The
rates on these have been linked to the
average 10-year bond yield for the past
three
months.
These
will

CHANGES YOU NEED TO MAKE

Investment
Q

Fixed deposit rates from banks will be better than returns from the
post office deposits in the new financial year
Q
Choose your tenure first and then, do a comparison of bank fixed
deposit rates before making the final choice
Q
Invest in the yellow metal via gold bonds

Insurance
Q

If your liabilities have increased, revise term cover upward

Revise health cover every three-five years to deal with medical
and lifestyle inflation
Q
Revise sum assured on home insurance if you have added to
household assets
Q

Tax planning
Q

Conservative investors should invest in PPF at the earliest

Those who can take some risk should bet on ELSS funds via SIPs
Q
Invest ~50,000 in NPS
Q

be revised every quarter now, make

them more volatile. People who want
to
invest
in
debt
and
want sovereign security should continue to invest in Public Provident
Fund (PPF). No other instrument gives
a tax-free return of 8.1 per cent with
government security, says Rao.
As for time deposits, financial
planner Arnav Pandya suggests,
From April, fixed deposits of banks
will give better returns than those of
the post office. Decide on your investment tenure, see which bank is offering the best rate for that tenure, and
invest in its deposit. Lock into current
rates fast, as even banks are expected
to cut their deposit rates.
Tax-free bonds are another good
option. Nabards recent issue carried a
coupon of 7.29 per cent for 10 years
and 7.64 per cent for 15 years. Beside
getting tax-free income, investors
stand to get the benefit of capital
appreciation if interest rates are cut.
People who have some risk
appetite may also look at debt mutu-

al funds and fixed deposits of stable

companies, adds Rao.
Gold
The sharp run-up in gold prices over
three months, owing to the rise in risk
aversion globally, took most people
by surprise. The sudden spurt emphasises the need to stay diversified and
have a 10 per cent allocation to the
yellow metal in your portfolio.
However, instead of using gold
Exchange-traded funds (ETFs), which
carry an expense ratio of 0.75-1 per
cent, invest via gold bonds, which
offer an annual interest rate of 2.75
per cent. The Budget made gold
bonds more attractive by exempting
these from capital gains tax at
redemption.
Tax planning
Start investing in tax-saving instruments from the beginning of the year.
Dont leave tax planning for the end
of the year, otherwise you may have to
scramble for funds, says financial

planner Ankur Kapur of ankurkapur.in. For those with the money,

Pandya suggests: Invest the entire
amount you need to in PPF before the
April 5. That will take care of tax planning for the year and you will also earn
interest on your investment.
Investors with a higher risk
appetite could start a Systematic
Investment Plan (SIP) in an Equity
Linked Savings Schemes (ELSS) fund,
which can give higher returns. If you
invest early in the year via an SIP, you
will reap the benefit of rupee cost
averaging, says Dinesh Rohira,
founder and Chief Executive Officer,
5nance.com. Pankaj Mathpal, MD,
Optima Money Managers suggests
linking all tax-related investments to
financial goals.
If you live in your parents house
and pay rent to them to claim House
Rent Allowance benefits, which is
perfectly legal, get a rent agreement
prepared.
With 40 per cent of the National
Pension System (NPS) corpus having
been made tax-free at withdrawal in
this Budget (the entire corpus was
taxed earlier), this has become more
attractive. Open an NPS account if
you have not done so already and
enjoy the additional tax deduction of
~50,000, says Anil Rego, CEO &
founder, Right Horizons. In view of
the low returns from annuities, into
which 60 per cent of the final corpus
must be compulsorily invested, dont
invest more than ~50,000.
Tax deduction under Section 24 is
available on the interest repaid on a
home loan. Buying a property to avail
of the benefit is not advisable if
the family has a primary residence,
says Rego.
Insurance
While reviewing your financial plan,
check if the term cover is adequate. A
familys insurance cover should be
able to replace the breadwinners
income stream. Financial planners
take into account household expenses, goals like childrens education and
marriage, and liabilities like home
loans when deciding on a persons
insurance requirement. If goals have
changed or liabilities have increased,
raise the amount of cover, suggests
Mathpal. Kapur says the premium rate
is likely to be lower if you buy the term
plan before your birthday.
Your health insurance cover
might also need to be raised to take
care of medical inflation. The same
holds true for household insurance if
you have reconstructed your house
and the structure has become more
expensive, or if you have added expensive
assets.
Rohira
suggests buying add-on covers
like accidental insurance and critical
health insurance for comprehensive
protection.