inflation and home loans

The finance minister's tax giveaways are what have saved tax-payers from the impact of inflation and higher home loan rates.

When Finance Minister Palaniappan Chidambaram completed his Budget speech on February 29, most tax payers were a happier lot because of the raising of income tax slabs, and the resulting reduction of the overall tax burden for everyone.

But in the four months since then, inflation has climbed into the double digits, reflecting an increase in the cost of both food items and fuel. Most banks have raised interest rates on loans by up to 0.75 percentage points.

"Though the FM had expected a rise in the inflation rate, even he would not have imagined the real numbers," says Madan Sabnavis, chief economist at NCDEX, the commodity exchange.

The tax benefits were quite significant. For a male taxpayer with an annual gross income of Rs 500,000 a year, after the eligible deductions of Section 80C (Rs 100,000) and 80 D (Rs 15,000), and after taking advantage of the higher tax exemption floor as well as the adjustment of tax slabs, the annual income tax liability would have fallen from Rs 74,160 to Rs 32,960, or by 55 per cent, yielding an extra cash in pocket of Rs 3,500 per month.

On the other hand, the inflation rate has risen by 5 percentage points in the last three months.

On top of which, home loan rates have risen by up to 0.75 percentage points. Someone with a home loan of Rs 12 lakh therefore finds that the equated monthly installment has risen by about Rs 500 per month.

The balance of these different elements still leaves our Rs 500,000 earner with a net benefit of perhaps Rs 2,000 per month or a little more (see table), though it would also be true that the value of his assets (house, mutual fund units, etc) would have fallen and left him poorer.

However, for people lower down the income ladder, the benefit-cost matrix works out quite differently - chiefly because the tax benefit they would have got would be less than Rs 3,500 per month, while the living cost increases would be broadly comparable.

If the home loan is for a smaller amount, it would mean a smaller increase in the EMI. For people with lower income levels, therefore, the net impact of the Budget and subsequent events may be broadly neutral, or in some cases even marginally negative.

The real losers therefore are those who have got no tax benefit (because they are below the tax-paying threshold) and who at the same time have had to cope with all the cost increases.

Investing through SIPs? Choose wisely

Sip is a mode of investment and not an investment avenue by itself. you need to determine a fund that is right for you and then consider making an investment via sips.

If you are about to retire soon and are going to rely on your investments to provide for your daily needs, there is a case for gradually shifting from equities to lower risk avenues like POMIS, FDs, FMPs.

You can withdraw the sip before completing term. however, check for the exit loads first, if any.

When to exit your mutual fund

With the Sensex tottering at 13,000 levels, a whole lot of investors would be wondering if they should exit their mutual funds or stop their monthly systematic investment plans. While the latter does not make sense, especially if you are in good equity diversified funds, the former can be contemplated in certain cases.

Generally, getting into a mutual fund is associated with a long-term relationship whereby, there are good times as well as bad times. However, most investors are willing to enjoy the upside, but at the slightest hint of a downside, they start crying foul. Here we address the issue of when you should take the tough call of exiting your mutual fund.

Consistently poor performer: There are times when even a star fund manager will not be able to get great returns. Especially, in times like these, where all funds are sitting on cash simply because of lack of opportunities.

In such times, there is no point in accusing the manager. However, even in good times, if he is unable to perform, then there is a case for exiting such a fund. For instance, a fund that has the mandate to go all out in equities moves out when the market is on the upside is taking a wrong call, but remember it's only in hindsight that one can say that. But someone who does it consistently is going wrong somewhere.

One such example is HDFC [Get Quote] Prudence Fund. It has an excellent track record in the past, but has performed dismally in the last several quarters. One of the biggest reasons for this is the exposure to mid-cap stocks. So despite a lower exposure in equities (74 per cent) than HDFC Top 200 (95 per cent), it has performed worse than the latter. In the last one year, HDFC Prudence has returned -14.45 per cent (category average - 10.09) whereas HDFC Top 200 has returned -8.92 (category average - 17.25).

Follow the manager: Fund houses often promote the fund manager's performance and new schemes are launched using the star manager's name. However, when the fund manager shifts jobs, the fund house respond by saying it is process-oriented and individual stars do not matter.

For instance, when Sandeep Sabharwal was the fund manager at SBI [Get Quote] Mutual Fund, there was a lot of noise created about his midas touch during the launch of SBI Bluechip Fund. However, there was not even a murmur when he exited the fund house.

Luckily for SBI Mutual Fund, the incoming head of equities proved to be as competent as his predecessor. Though the entry/exit of a star manager should not be a criteria, reading the latest fact sheet will give you an idea whether the portfolio has been churned, in terms of stocks, sectors, asset allocation or strategy.

Size of the fund: Often this is a function of how fast the fund swells in size, the market situation and the fund manager's ability to deploy funds. Reliance [Get Quote] Growth continues to shine and deliver top notch performance even after the scheme had crossed $1 billion mark.

On the other hand, there are even funds that have a small corpus of Rs 100 crore (Rs 1 billion) and still deliver sub-standard returns. However, when the fund closes subscription because it does not know what to do with the additional money, it is an indication that you should take your money elsewhere.

Need money for a goal: This is one of the most important reasons to sell a fund. When you have achieved your targets or approaching one, you can move partially or even, the entire corpus to debt. Selling a fund at that point in time makes great sense because you are not exposing the corpus to any more risk.

Rebalancing your portfolio: If your equity allocation has exceeded the asset allocation numbers then you can either move some of your worst performing funds into debt/cash or add additional funds to the debt part of your portfolio namely FMP's. It's best to undertake the asset allocation exercise as an annual ritual.

Before you press the sell button, take stock of the tax implications and exit loads, if any. And given that market movement are random and not in the hands of the investors, don't try to time your exit.

The writer is director, My Financial Advisor.

Thursday, 24 July Market

Early trade looked promising, but profit booking ate up gains and the market traded in the negative terrain for most of the session today. Sensex ended at 14,777, down 165 points from the previous close. Nifty shut shop at 4433, down 43 points. CNX Midcap and BSE Smallcap indices lost 0.3% each. Oil & gas and realty stocks saw some buying interest, while metal, consumer durables, and IT stocks dragged. Biggest losers on the Sensex included TCS, Tata Steel, Reliance Communications, SBI and ACC, while gainers were ONGC, DLF and RIL, among others

If the Nifty falls below 4350, then expect to see 4200-4150 also

The market opened good, but gave in to profit booking after an hour or so. Sensex ended the day at 14,754, down 187 points (provisional) from the previous close, and Nifty at 4427, down 49 points