Reducing interest rates, lower yields from fixed return products, increase in tax exemption limits, increase in peak income tax rate touching 35.1 per cent in 2000-01 (settling at 33.6 in the last three years) and a booming economy with higher salaries has thrown up many choices for the brave new Indian. Today, there are over a dozen insurance companies, over 30 mutual fund players (each offering dozens of schemes), more private banks and a financially literate population that is gradually shifting from the conservative mindset to the more realistic mindset of a market-linked returns financial product.
Take the traditional bank deposits, post office and pension schemes, for example. The last 10 years have disturbed the life of 71-year-old N. Venkataraman of Chennai, who retired from a PSU and invested his gratuity and pension in the above-mentioned schemes. "All my calculations based on the then prevailing interest rates are making me jittery. My retirement corpus is being eroded faster than I had anticipated," he admits. He’s just one amongst the lakhs of senior citizens who are finding the changing scenario difficult to get used to. Add to that the escalating medical costs that Venkataraman’s family is living with and it seems like a situation that no one would wish to be in.
Explains Gaurav Mashruwala, a Mumbai-based financial planner, "Since shifting from a protected economy where the rbi decided on bank interest rates in 1993, we have come a long way, when market benchmarks are the norm." The subsequent changes have reduced Venkataraman’s inflows—interest rates are invariably lower than inflation, leaving too less in hand to fend for himself, his wife and an ailing mother. Admits Venkataraman, "Last year when the interest from bank fixed deposits was taxed, I seriously thought of investing in ELSS (equity-linked savings schemes) and even terminated an existing FD."
But now, since Budget 2006 has provided a tax break for FDs of five years and above, many might wish to look seriously at this savings mode. Or, as Venkataraman says, people might stick to parking small funds in equity-linked schemes given the frenetic rise in the Sensex and the Nifty. There’ll be cases where people would act the way the Bangalore-based, 32-year old, Tarun Vashistha plans to do. A senior manager in a consulting firm and in the highest tax bracket, his earnings have been on the rise ever since he started his career 10 years ago. But he had to change his tactics on a regular basis.
For instance, last year, the fringe benefit tax (FBT) spoilt Vashistha’s party as his tax burden went up. But this year, he’s happy with the budget changes on superannuation contribution. With the employer’s contribution up to Rs 1 lakh exempt from fringe benefit tax this year, he feels there is some incentive to continue his superannuation contribution, "I felt that after my insurance requirements, the only thing I was missing on was a retirement nest. This new limit of Rs 1 lakh will help, though had it been some more I would have been more happy."
Given the fact that the budgets have a tendency to wreak havoc with the lives of the middle-class salaried person, we look at how things have changed in the case of a retired man, a family in the lowest tax bracket, and two families in the highest tax bracket. How do these individuals and families manage their finances and investments to counter the ever-changing requirements and needs that are almost inevitable?
At 48, Dr Prashant Bhushan, a Delhi-based paediatrician, has been a rather active trader in the capital markets and a successful one too. "My earnings from insurance policies, post office schemes and public provident fund were going down each year. Five years ago, I tested the stockmarkets with small amounts and discovered that I could earn twice what I would have earned from fixed return instruments," he says. He is among the fast-emerging breed of people who are shifting from the assured return product regime to riskier but higher-yielding products. Moreover, the ease of trading in stocks with the setting up of online brokerages has made people like Bhushan utilise their free time in a productive manner. The changes in the last two years, including the opportunity that’s available to individuals to participate in overseas markets through domestic mutual funds because of Budget 2006, has bolstered the growing numbers of retail investors. Lakhs of eyeballs in urban middle-class homes are hooked on to CNBC and NDTV Profit, rather than entertainment channels.
"As long as fixed-returns products were earning more than inflation, people were happy and remained conservative; however post-inflation yields are not attractive anymore," feels Swami Saran Sharma, a Gurgaon-based chartered accountant. And, with the capital markets doing extremely well over the past five years, the gains investors are making in the markets is making the fence-sitter take the plunge. In fact, in the last two-odd years, mutual funds, stocks, gold and real estate are all asset classes that have delivered good returns. (However, inflation needs to be looked into differently. Inflation is pegged to the wholesale price index that revolves around commodities and does not look at services, which account for over 50 per cent of the GDP. So, while mathematically one may argue that returns on certain financial instruments beat or match inflation, in reality they might not do so.)
Says Ashish Kapur, CEO, Invest Shoppe, a Delhi-based stockbroking firm, "A well-regulated stockmarket, greater disposable incomes, better returns from equities and an overall good corporate performance are factors that helped build up the confidence of the small investors." But there’s still a long way to go. If one looks at the share of various forms of financial savings (see chart), currency and deposits are losing preference and life insurance is fast becoming a preferred instrument. Despite the current hype, equities find less than two per cent share in the entire product gamut.
In this changing scenario, what is an ideal financial plan? Says Mashruwala: "The tenets of financial planning rest on wealth protection, accumulation and distribution. The earlier you adopt this principle, the better you are likely to be financially in later years." In fact, he goes on to add that the 20s and 30s are the golden savings years, when one has low liabilities and few dependants. However, one must control luxury expenses if one wishes to build on the wealth as prescribed by Mashruwala.
The largest asset of most middle-income families is their home. Once these families buy a home, they create an asset that brings in its share of benefits other than the asset value that it has. Says Suraj Kaeley, chief marketing officer, Metlife, "Once you take a housing loan, your principal repayment takes care of a big chunk of your tax benefits and, if you are employed, the provident fund contribution takes care of the next big chunk to avail of tax benefits." These are good tax incentives to make one look at housing as an option as early as possible in life, even though shelling out the monthly EMIs may not seem that easy an affair.
Listen to what 40-year old Sudhanshu Bahuguna, a music teacher in a government school in Delhi, has to narrate. Along with his wife Srabani, also a music teacher, their combined Rs 4.5 lakh income makes for a hand-to-mouth existence in the big city. Though he built a house in the suburbs three years ago, the EMI on the home loan leaves him with little surplus in hand. "It’s tough to think of a life other than the employment that I have. Costs are rising and it worries me whether I will be able to provide for a better foundation for my six-year-old son," he laments. But what he has forgotten to take into account is that his tax burden has gone down and over the next 10 years he would have created an asset for his family. Mashruwala has a word of praise for Bahuguna, "It is wise to own a house even if it is on a loan. It is an asset that will only grow."
Vashistha agrees: "I was initially investing in a mixed portfolio with equity, mutual funds, insurance and fixed deposits as well. However, five years ago, I felt that real estate is a better instrument to bet on in the long run." He is a happy man today, though he is still paying his EMIs. His investment in real estate, other than the house he is living in, is being valued at over three times the original price. "If I trade in the flats today, I will get a better return even after repaying the loan I took," he exults.
But it’s the stockmarket that’s exciting the urban middle class these days. The Bahugunas, for instance, are not only thinking of adding to their insurance portfolio in a unit-linked plan but also contribute in a mutual fund using the SIP (systematic investment plan) route. Adds Kapur, "With monthly commitment to SIPs at Rs 500, many investors are willing to try the markets through these less risky financial products. It is a big shift that we are witnessing." Bhushan, though slightly hit by the securities transaction tax hike, is also willing to bet his money on the markets. His reason? "It is better to book profits and pay stt than worry about long-term capital gains. It makes sense to play the markets with due diligence and expert advice," he cautions. The fact that today over 30 per cent of his savings goes into equities speaks volumes of his faith in the markets.
"Investors will have to constantly change their investment focus to benefit from the changing environment and react quickly," feels Sharma. He stresses that though one should not look at investing for tax savings—as was the norm in the good old days—one should make good use of tax incentives if they can be accommodated in an individual’s financial plans. The last three years have seen a spate of ipos (initial public offerings) hit the markets. Over 50 new mutual fund schemes have been launched; housing loans more or less at their lowest levels have boosted spending power in the hands of individuals. And, with a clear shift towards a market-linked return financial instrument portfolio, one needs to adapt quickly to this dynamic world where the only constant is change. "Create a contingency fund, invest across instruments to match your financial goals to make the best of the situation," sums up Mashruwala. High risk, higher returns—that’s the new mantra.
