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  1. How budget impacts fixed deposits, National Savings Certificates, others; 3 powerful points to know

How budget impacts fixed deposits, National Savings Certificates, others; 3 powerful points to know

FOR retail investors, especially the salaried class and senior citizens, fixed deposits constitute a major part of their investment portfolio.

By: | New Delhi | Published: January 27, 2017 1:28 AM
Mutual funds as an investment option is slowly finding acceptance, especially among the younger generation. Mutual funds as an investment option is slowly finding acceptance, especially among the younger generation.

FOR retail investors, especially the salaried class and senior citizens, fixed deposits constitute a major part of their investment portfolio. The other popular investments are Kisan Vikas Patra (KVP) and the National Savings Certificate (NSC). Mutual funds as an investment option is slowly finding acceptance, especially among the younger generation.

So, how does the Union Budget influence the investment options in debt products. It is the post–Budget action, rather than the pre-Budget forecast which gives the answer.

Debt mutual funds

Debt mutual funds as a long term investment product has been slowly increasing its share in the fixed income space. In the overall Assets Under Management (AUM), which, as of December 2016 was over R16.50 lakh crore, debt mutual funds contribute to more than 65% of the total AUM. Equity AUM is less than 30% of the overall AUM.

Be it liquid mutual funds, in which the investor can redeem without an exit load, or an accrual or duration product where there is an exit load, typically for a period less than 12-18 months, the growth in assets has been significant. This has typically slowed down the growth in bank fixed deposits. Bank fixed deposits are a significant source of income for banks. The spread in the rates contributes to the net interest income of the banks.

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Previous tax changes

In Budget 2014, the government made a few changes in the debt income space. The holding period to qualify for long-term capital gains in debt mutual fund, was increased to 36 months, as compared to the existing 12 months, prospectively. What it meant was that the investor would now have to stay invested for 36 months to take the benefit of long-term capital gains. Also, the gains would now be taxable at 20% and not at 10%.

The divided distribution calculation was also changed. The dividend amount payable was grossed up, which resulted in additional tax of 2.47%.

Overnight, debt mutual fund products lost some of its shine. The calculation become more complex and with lower yields, bank fixed deposits once again was looking attractive. Investors who had planned on an investment horizon of 12-24 months had to realign the horizon or exit with lower returns. No such surprises or product change was put forth in the Budget proposals of 2015 and 2016.

Credit quality

While investing in fixed income products, be it bank fixed deposits or debt mutual funds, the quality of credit paper should be the investor’s primary consideration. Also, liquidity and repayment of capital invested at assured timelines must be be seen before investing. What should not be forgotten is the re-investment risk, which maturity of the deposits bring in. So even this year’s Budget and the measures should not be the key determining factor. Asset allocation and your goal with milestones must be factored in before investing.

The writer is founder and managing partner of BellWether Advisors LLP

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