2016 is around the corner and it’s time to look out for opportunities which shall knock the door. But first let’s look at the overall economic condition of the Indian economy; the significant initiatives taken by the government of India will further strengthen the economy and pave the way for investors.
India is already on the road to become hub for startup companies which are driving innovation and creating new markets. The positive momentum set in the economy and with the recent rate hike by FED will add a flavour of enhanced returns on equities. Also with focus being on promoting infrastructure growth in the economy Tax Free Bonds has been given a boost.
Before you start looking for investment opportunities in 2016, it’s also time to review your portfolio if you have already invested. And in case you are a first time investor, make “investmenting” one of your New Year Resolution and start one too.
1. Equities - SIP IT!!!
SIP refers to Systematic Investment Plan. Equities offer you an opportunity to be part of the economic growth and also capital appreciation on your portfolio. Unlike direct investment in shares, investment in mutual funds can be done regularly through Systematic Investment Plan (SIP).
With the positive momentum and economy set on the growth trajectory equity market is set to benefit the most. Thus it’s wise to be part of the positive phase and create a corpus for yourself. However, the question is how to choose among the equity avenues, where to park your funds. Within the equity allocation one can choose from Large Cap, Mid & Small Cap, or Balanced funds. However the ideal portfolio would be one which will be spread across multiple categories, rather than skewed towards one in particular.
2. Tax Free Bonds – Free Lunch for Sure!!!
It is said There are No Free Lunches in Business, but surely this one is an exception. Often returns earned from investments either in form of capital gain or interest are subject to tax. In case of interest income received on avenues like Fixed Deposits, Bonds etc. are taxed as per the income tax slab. Thus the tax deduction will reduce your overall returns.
For example;
Interest Rate on Bond 9%
Tax Slab: 10%, 20%, 30%
Returns post Tax: 8.10%, 7.20%, 6.30%
Thus sometimes the returns post tax could be lower than the inflation rate too, which would lead to negative returns on your investments. However, tax free bonds are unique and different when it comes to taxation; the interest earned from these bonds is free of tax i.e. Non Taxable. Tax free returns will further help to boost the overall returns on the portfolio.
3. Debt – Reduce Risk
Debt as asset class invest in instruments like Bonds (Government/Corporate), money market instruments etc. However, based on the investment style debt funds can identified as lower risk investments as compared to equity but they do not offer guaranteed returns.
Debt funds should form part of one’s portfolio, especially for those needs/goals are short term in nature. Within the debt funds category, an investment can be classified as Long Term or Short Term based on the maturity of the underlying assets. The investments which have a higher maturity will be more sensitive to changes in interest rates.
4. Risk Cover
With the changing demographics and life style pattern, human health and life is more exposed to risk and uncertainties. Thus it is advisable to get a risk cover for yourself and your entire family. A risk cover will be helpful only in reducing the financial burden on the family members in the event of uncertainties. For life, you can take a pure risk cover whereas for health ideal option would be a family floater plan.
Key Takeaway
1. Make investments as your New Year Resolution
2. Review your portfolio periodically
3. Invest in equity through SIP
4. Take most out of Tax Free investments
5. Do not miss out on Risk Cover
(Author Anil Rego is the CEO & Founder, Right Horizons. He writes on personal finance for IBNLive)
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