THE BUDGET- DONT FRET THE SMALL THINGS

(This appears in today's Deccan Chronicle/Asian Age) The budget changes nothing as far as our investment strategies or themes are concerned. If anything, it reinforces the tried and trusted routes. First let me talk about a couple of supposedly new things that this budget talks about. A new scheme called Rajiv Gandhi Equity Savings Scheme is proposed. The scheme would allow for income tax deduction of 50 per cent to new retail investors, who invest up to Rs. 50,000 directly in equities and whose annual income is below Rs.10 lakh. The scheme will have a lock-in period of 3 years. We have to wait and see what the ‘permitted’ equities that this scheme will cover. It is very unlikely that this deduction will be allowed for any universal investment. For, if it is so, I will happily buy shares or Infosys or HDFC or HUL or ITC and laugh my way. I can buy every year. So, I think they will limit it to either IPO’s or shares in PSUs or some such things. To me, if they let us invest in any share, it is a bonanza. Imagine buying quality shares at a meaningful discount! I only hope that they do not make it like the ELSS in mutual funds. It is unfortunate that the ELSS schemes have done poorly as compared to open ended diversified schemes. One would think that a three year lock in would help the fund manager to take a better view, but our fund managers seem to be at a disadvantage when they get money that is medium term, with no calling back for three years. The other interesting thing that stands out to me is the clear superiority of buying gold in the ETF form rather than physical. This budget imposes many financial burdens on buying jewellery. The budget proposes a tax collection at source on purchase in cash of bullion or jewellery in excess of Rs. 2 lakh. This looks like it is aimed at curbing black money, but my feel is that people will continue to buy in cash without an invoice. For those of us who would like to invest in gold, physical gold now becomes less attractive and the ETF route becomes a winner again. This has no TDS, no ‘making’ charges and no excise duty etc., In fact, one of the fund houses has recently launched a gold ETF where you can get physical gold in exchange if you have more than 10 grams equivalent in the ETF. Wonder what the authorities are going to do to this mode. Technically, one can beat the TDS route by redeeming for less than Rs.2 lakh worth in one transaction. In jewellery, it may not be possible to split the bills if a single piece costs more than two lakh rupees. A small reduction in the Securities Transaction Tax does not make too much difference to anyone, since the absolute amounts are going to be miniscule. It may help someone who is a compulsive “Buy Today Sell Tomorrow” punter. The one big negative thing for retail investors is the imposition of TDS on debenture interest when the interest payment exceeds Rs.5,000/- in a year. If one has a lakh of rupees in debentures and the annual interest is Rs.10,000/-, there will be deduction of tax at source. The present rate is 10% and maybe this would apply. This will be a big negative for the retail bond investor. Many senior citizens I know are within the taxable income limit and put substantial money in to bonds because there is no TDS. Now, they will have to live with lower returns. Yes, they will get a refund if they file returns and wait for one to three years. Most senior citizens I know will have a problem filing returns since they will have to find a consultant and spend money on it. I hope the government has a relook at this and like in Fixed Deposits, let the investor file a form for non deduction of tax at source wherever applicable. On the one hand, the government talks about broadening the bond markets and here they create operational problems. This budget will of course make many things expensive for us. The benefits that we have got are miniscule. Our hope and prayer should be for reduced inflation and lower oil prices. Do not lose much sleep over changing investment strategies or philosophies. R. Balakrishnan March 17th, 2012