And as things stand at the end of the year, most asset classes have given below average returns. But experts believe that things will look brighter in 2019.
So, to take advantage of this, here are 11 smart money moves you can make in the new year. These strategies can improve your finances and make your richer in the new year.
1. Use SIPs to benefit from volatility: SIPs can help you ride the heightened volatility in this election year.
Stock prices may fluctuate within a narrow band in the run up to the elections, and may later move sharply in either direction depending on the poll outcome. During this period of heightened volatility, it is critical that investors do not stop their SIPs.
Sticking with SIPs during lean phases pays
Continuing SIPs has rewarded investors after the rebound in market
|SIP Period||CAGR||Amount invested||Final Value|
*Rs 10,000 invested monthly in Franklin India Prima Plus Fund
In fact, this market turbulence is likely to help investors benefit from rupee-cost averaging—buying more fund units when they cost less and less units when fund NAVs rise. So, if you stop your SIPs during this period, you are likely to miss the opportunity to accumulate fund units at low cost, and by the time you restart SIPs, the market may already have run up.
In Pic: Amol Joshi Founder, Planrupee Investment Services
“Investors should welcome volatility during the beginning or middle stages of their SIPs.”
Staying invested is particularly critical for investors who have started SIPs in the past 12-18 months. “It is during volatile periods that SIPs work best. Investors should actually welcome volatility during the beginning or middle stages of their SIPs,” says Amol Joshi, Founder, PlanRupee Investment Services. As the table shows, historically, investors have gained by continuing SIPs through lean market phases and sticking around for longer terms.
2. Consider alternatives to large-cap funds
Most actively managed large-cap funds struggled to beat their benchmark indices last year, and their prospects aren’t bright this year too. “Investors should reset expectations from large-caps,” says Rohit Shah, CEO, Getting You Rich. If you want higher returns and can digest higher volatility, you may opt for actively managed multi-cap funds instead.
Large-caps have struggled
Source: Value Research Data as on 25 Dec 2018
These funds are better positioned to deliver alpha due to their flexibility to invest across market-caps. Also, as most multi-caps have a sizeable large-cap exposure, their risk profile is much lower than that of a mid- or small-cap funds. But, invest in them only if your risk appetite permits and stay invested for at least five years.
3. Harvest capital gains from equity MFs: Regular churning will keep gains from equity funds below the Rs 1 lakh threshold
The reintroduction of tax on longterm capital gains from stocks and equity funds has not depressed the small investor’s appetite. After an initial hiccup and some panic selling, markets resumed their upward march. The monthly SIP inflows into mutual funds rose 20% in 2018 as investors realised that the potential gains from equity funds could be higher than the 10% tax on gains beyond Rs 1 lakh. Indeed, the 10% tax will not make a big dent in the overall returns. In fact, small investors with SIPs of Rs 5,000-10,000 may not come under the ambit of the tax immediately.
Your SIP gains may soon become taxable
Start harvesting gains to avoid them building up to huge levels
However, bigger investors with monthly investments of Rs 30,000-50,000 could get affected. If you invest Rs 30,000 per month in an equity fund, even 12% annualised returns will lead to taxable capital gains within two years. Therefore, investors should consider harvesting their capital gains regularly to prevent gains from building up.
In Pic: Deepti Goel Associate Partner, Alpha Capital
“Discipline is critical. If the investor redeems but doesn’t reinvest, the purpose is defeated.”
Here’s how to go about it. If you started SIPs about a year ago, start redeeming units after they complete a year and reinvest the proceeds in the same or different fund. This will reset the buying price of the units and ensure that your capital gains do not overshoot the Rs 1 lakh tax free threshold anytime soon. Suppose you have an SIP of Rs 25,000 running in an equity fund. If the NAV of the fund in April 2018 was Rs 25, it would have fetched you 1,000 units. When these units complete a year in April 2019, sell the units and reinvest the proceeds. Similarly, keep doing this as and when more SIPs complete one year.
4. Switch to save on interest outgo
From 1 April, all new floating rate retail loans, including housing, auto and personal loans, are set to be benchmarked either to the RBI repo rate, the 91/182 days treasury Bill yield or any other benchmark market interest rate. The banking regulator wants banks to move away from using internal benchmarks to ensure transparency and better responsiveness to interest rate movements in the system. For borrowers, this could eliminate complaints about banks being quick to raise rates, while not displaying the alacrity when it comes to reducing rates in line with RBI policy action. However, they have to be prepared for more frequent rate resets.
The most effective way of ensuring that your get a fair deal would be to take advantage of competition among banks to attract new borrowers. Even after the new external benchmarking mechanism is implemented, you can benefit from switching to lenders who are willing to charge a lower rate. However, before you opt for balance transfer, negotiate with your existing lender. If the lender refuses to reduce rates, you can take the call to switch. Be mindful of the balance loan tenure as well. The EMI’s interest component is high in the initial years, and you stand to gain much if you switch in the early years of the loan. The benefits of loan refinancing go down as the tenure progresses.
5. Buy December 2019 Nifty call instead of index fund: Sometimes, F&O strategies can yield better returns for investors than even an index fund
We usually don’t recommend futures and options (F&O) strategies to our readers because it is a high-risk segment that encourages speculation and can lead to big losses. If the market does not move as expected, you can potentially lose more than you invest. However, the F&O segment sometimes offers opportunities where the risk is the same as an index fund. For instance, the December 2019 Nifty ‘call option’ with a ‘strike price’ of 5,000 closed at Rs 5,685 on 28 December. This call option gives you the right to buy Nifty at 5,000 on its expiration date of 26 December 2019. You have to pay Rs 10,859, if you want to buy Nifty through an index fund (Nifty closing value as on 28 December).
In Pic: Feroze Azeez Deputy CEO , Anand Rathi Wealth Services
“As 5,000 Dec 2019 Nifty option is below its intrinsic value, buying it is better than buying a Nifty ETF.”
However, your actual cost of buying one Nifty through the F&O route is only Rs 10,685 (Rs 5,000 + Rs 5,685). Buying options is for protection and therefore, options usually trade above their ‘intrinsic value’. In this case, it is trading below its intrinsic value of Rs 5,859 (actual Nifty closing price of 10,859 – 5,000) and therefore, worth picking up by long-term investors. “Since 5,000 December 2019 Nifty option is available at below its intrinsic value, it is much better than buying a Nifty ETF,” says Feroze Azeez, Deputy CEO, Anand Rathi Wealth Services.
The December 2019 call is trading below its intrinsic value because it is deep in the money and therefore, involves a very high outlay (Rs 5,685 upfront) per Nifty. Second, the lot size of Nifty options is 75; so the initial allocation will be Rs 4.26 lakh. Since most derivative traders use margin funding, they avoid options with high initial investments. The high initial cash allocation, however, should not deter investors.
After all, they will have to shell out more if they buy an index fund. Buying 75 Nifty would entail an investment of Rs 8.14 lakh. By buying the call, they get the same exposure at a lower cost. The balance Rs 3.88 lakh can be invested in a debt product or arbitrage fund to earn a modest 7% return. So on a combined basis, you will be able to beat the Nifty by around 5% in 2019 – both in bear and bull market scenarios.
Better then index fund
Risk-reward in the F&O segment is favourable compared to index fund
6. Opt for short-term debt funds: Uncertainity on interest rate movement makes long-term debt funds risky.
Given the uncertanity on interest rates movement, it is not the right time to opt for long-term funds, say experts. These funds invest in bonds with longer maturities, seeking to benefit from softening interests.
Short term debt funds have topped the peformance charts
Despite the recent uptick in long-term debt schemes, they have been trumped by short-term funds.
Dhawal Dalal, CIO, Fixed Income, Edelweiss Mutual Fund, instead advises booking profits in this space: “Investors should gradually move away from long-term debt funds as they currently don’t offer enough compensation to take on the incremental risk.”
In Pic: Dhawal Dalal CIO,Fixed Income, Edelweiss MF
“Long-term debt funds don’t offer enough compensation to take on the incremental risk.”
He suggests opting for short-term funds with maturity profile of up to three years. Avnish Jain, Head, Fixed Income, Canara Robeco Mutual Fund, says investors may also consider corporate bond funds with a strong credit profile. He reckons corporate bonds with 2-5 year duration profile offer better value at this point
7. Go for FMPs for stable returns, lower tax
Debt funds carry interest rate risk. If rates go up, a debt fund will lose money. If you are not comfortable with this risk, go for fixed maturity plans (FMPs). These funds buy debt securities and hold till maturity so their returns are equal to the prevailing bond yields.
Like in the case of debt mutual funds, short-term gains from FMPs are taxed as income. But if held for more than three years, the gains are treated as long-term capital gains and taxed at a lower rate of 20% after indexation.
3-year FMPs on offer
The indexation benefit is enhanced, if the holding period runs across more than three financial years. Some of the FMPs available right now will mature in 2022-23, so you will get four years indexation, even though the holding period will be just 40-odd months.
8. Time to seriously consider NPS: The scheme shed some of its problems and became more attractive in 2018.
More than 30% of the respondents to an online survey conducted in November 2017 said they didn’t invest in the NPS because of the tax treatment of the corpus. When they retire, NPS investors have to use 40% of the corpus to buy an annuity and can withdraw the remaining 60% of the corpus.
In Pic: Archit Gupta CEO, Cleartax.in
“Negotiate with your company for the NPS benefit. It can help reduce your tax outgo significantly.”
Till now, only 40% of this withdrawn amount was tax free, while the remaining 20% was taxed. In December, the government removed that impediment by making 60% of the corpus tax free at the time of maturity. This is just one of the several negative features that the pension scheme got rid of in 2018. In October, the Pension Fund Regulatory and Development Authority allowed investors to allocate up to 75% to equities in the active choice option. Investors can also remain invested in the scheme till the age of 70 and stagger their withdrawals.
Double-digit returns in past five years
Aggressive investors have earned the highest returns in the long term
Returns as on 26 Dec 2018. These are average returns of the eight pension fund managers. They have been blended as per the asset mix of the portfolio. 3- and 5-year returns are annualised. Source: Value Research
Apart from these changes, the tax benefits offered by NPS make the pension scheme a compelling option for investors in 2019. Under Section 80CCD(2), up to 10% of the basic salary contributed to the NPS on behalf of the employee by the employer is tax free.
More tax can be saved by investing up to Rs 50,000 in the NPS under Sec 80CCD(1b). “The time has come for investors to seriously consider the NPS,” says Archit Gupta, CEO of tax filing portal Cleartax.com. His advice to taxpayers: Ask your employer to offer the NPS benefit which can cut tax significantly. What’s more, the NPS fund managers are no longer required to mimic the Nifty and can invest on a larger universe of stocks. This, and the raising of the cap on equity allocation, pit the NPS against ELSS tax-saving mutual funds. What works for the NPS are its ultra low charges. “The expense ratios of NPS funds are 0.01%, which is a fraction of what ELSS funds charge,” points out Sumit Shukla, CEO of HDFC Pension Fund.
9. Go slow, but don’t shun US-focused funds
Funds investing in US stocks enjoyed a breezy ride until a few months ago, but their NAVs have fallen sharply over the past three months. This, however, shouldn’t lead investors to shun US-focused funds. “Three months is too short a time horizon to judge any equity fund’s performance,” says Rohit Shah, CEO, Getting You Rich.
Lately, US-focused funds have taken a heavy beating
|Fund||3-Month Return (%)||3-Year Return (%)|
|Franklin India Feeder Franklin US Opportunities||-25.28||4.94|
|Motilal Oswal NASDAQ 100 Exchange Traded||-22.09||10.71|
|Kotak US Equity Standard||-21.94||5.28|
|DSP US Flexible Equity||-19.03||8.12|
|ICICI Prudential US Bluechip Equity||-17.79||8.3|
|Edelweiss US Value Equity Off-shore||-17.31||5.78|
|Reliance US Equity Opportunities||-16.17||9.7|
Note: 3-year returns are annualised Source: Value Research Data as on 25 Dec 2018
These funds invest in strong businesses with high brand equity and robust cash flows and offer healthy diversification to one’s portfolio. Besides, they also stand to gain from depreciation in the rupee over the long run. “Those who expect any expenditure in dollar terms in the medium term— child’s higher studies abroad, a foreign vacation, etc.—should particularly include a US focused fund in their portfolio,” says Vidya Bala, Head Mutual Fund Research, FundisIndia. However, she suggests that investors avoid actively managed funds from this space and stick to an index-based offering like the Motilal Oswal Nasdaq 100 ETF.
10. Invest in name of senior citizen parent: Interest up to Rs 50,000 a year is tax free for those above 60.
The 2018 Budget had given senior citizens an additional exemption of Rs 50,000 for interest income. If your parents are not in a very high income tax slab, you can gift money to them and get them to invest in small savings schemes or fixed deposits.
In Pic: Sudhir Kaushik Co-Founder, Taxspanner.com
“It is perfectly legal to gift money to a parent to invest. It will not be treated as a sham transaction by the tax authorities.”
The cherry on this cake is the higher interest rates offered to senior citizens by almost all banks. Assuming an interest rate of 8%, one can invest up to Rs 6.25 lakh to earn Rs 50,000 tax free from this strategy. Unlike gifts and investments made in the name of a spouse, gifts to parents and investments in their name will not be subject to clubbing. “This is perfectly legal and will not be treated as a sham transaction,” assures Sudhir Kaushik, chartered accountant and Co-founder of the tax filing portal Taxspanner.com.
Best senior citizen deposits
Five-year deposit rates for those above 60
Also, there is no gift tax on the money you give to your parents. So make use of their a basic tax exemption limit—Rs 3 lakh for people above 60 and Rs 5 lakh if they are above 80 years of age. In case they are exceeding the exemption limit, help them save taxes by investing in a scheme that is eligible for deduction under Section 80C.
11. Opt for multi-year health insurance, cut premiums: These plans offer an upfront discount, if you pay the premium for multiple years in advance.
Some New India Assurance customers, particularly in the older age groups, were hit hard as their health insurance premiums were hiked up to 100% in 2017. While this was an extreme case, unlike life insurance, your health insurance premiums rise with age.
In Pic: Bhakti Rasal Certified Financial Planner
“Paying multi-year premiums upfront protects against premium hikes, besides securing you a discount on premium.”
However, if you opt for a multi-year health plan, which requires you to pay the premium for several years in one go, you can avoid bearing the brunt of higher premiums over the next few years. The other advantage of multi-year health plans is that they offer discounts of 7-10% on premiums, compared to regular plans. In fact, a 40-year-old can save more than 20% in premium outgo in three years, if he opts for a multi-year health plan (see table) compared to a plan where he has to pay premiums annually.
Multi-year health cover is lighter on your pocket
A 40-year old male can reduce his 3-year premium outgo by more than 20%.
Note: Premiums pertain to Religare Health Insurance and include GST at 18%. NA: Not applicable
“Multi-year plans are especially useful if you fall in the higher age brackets. A 65-yearold can see a sharp jump in her renewal premium when she turns 66 as the basic premiums are linked to age bands,” says Bhakti Rasal, a certified financial planner.
Also, this financial year onwards, you can maximise tax benefits under Section 80D. Until last year, you could claim the tax break only in the year in which the premium was paid. Now, the premiums paid for more than one year will be allowed for deduction proportionately. For example, if your annual premium works out to be Rs 10,000 in 2018-19 and you have paid Rs 18,000 as upfront premium for two years, you will be able to claim a deduction of Rs 9,000 each in 2018-19 and 2019-20.
(With Preeti Kulkarni & Sameer Bhardwaj)