Popular traditional debt products such as fixed deposits suffer from tax inefficiency. And their post-tax returns have little chance of beating inflation. An investor needs to put his money in products that help him diversify his portfolio and allocate assets right while minimising the tax outgo.
A major constraint in portfolio design is tax treatment — only products that have at least 65% of the fund invested in equities enjoy a favourable tax treatment. However, such a portfolio exhibits volatility that does not go down well with the majority of investors. Truth is, it is the unhedged exposure to equities that causes volatility. If equity investments are hedged with a judicious use of derivatives, it would not only make the product more acceptable to investors but also help generate arbitrage income. A product, by design, should allocate assets effectively and efficiently between the components of the financial markets, namely debt, equity and derivatives.
Investing a major portion of the portfolio towards generation of regular income and a moderate portion towards growth would be an ideal way to satisfy the investor’s expectations. Given the recent macroeconomic and political developments in the country, the two major financial asset classes — debt and equity — are in a sweet spot right now.
Inflation has not only peaked but has also exhibited a falling trajectory in the past few months. A sub-6% headline for the CPI is a huge relief both for the government and the RBI. This should give the central bank enough room to ease interest rates going forward. This is a huge plus for the bond market, which could see substantial capital gains due to falling yields.
Falling crude price is another major positive for inflation numbers and the fiscal scenario of the country. Decontrol of diesel prices would again help the fiscal health and, hopefully, reduce — or at least restrict — the government’s borrowing programme.
And these factors, coupled with the new dispensation at the Centre, could be exactly what the doctor ordered for the equity markets. Benign inflation, falling interest rates and perceptions of robust policy action are the right ingredients for strong consumer and investment sentiment.
It is heartening that Indian retail investors have started participating in the equity market of late through the mutual fund route. The loose monetary policies of Japan and Europe are likely to provide adequate global liquidity to foreign investors to keep their Indian investments buoyant.
By Nimesh Shah
The writer is managing director & chief executive officer, ICICI Prudential AMC