LoanRaja Blog- Personal Finance Guide

Interest rates more volatile? Rate cuts have become a regular affair but the consumer and banker is not enthused about borrowing or lending. Both need a bigger push from the government
In recent times, interest rates have turned more volatile than equity markets. Not surprising considering the fact that there is talk of a rate cut on a weekly basis. It is the expectation of these cuts which is keeping the Indian market swing in a wide range. If you look at some of the other global markets, the volatility in interest rates is not exciting for traders. Now, will we have a rate and if it comes through, will it get us out of the current slowdown which is all around us?

In fact, many have been complaining that life hasn’t changed in a big way after the recent rate cut which has pushed banks to cut down interest rate by 0.75%. The crib is that home loan rates are still in double digit and well above the comfort zone for many. As a result, borrowers are not exactly rushing to banks for buying property or cars.

If government is thinking of another cut in interest rate or stimulus package, it is due to the non responsive behaviour of the consumers. However, for the consumer, the problem is not merely on the rate front. In the case of property, developers are unwilling to press the price revision button having created land banks during real estate boom. As a result, you still find the property prices on the higher side as the developer is not ready to offer a discount of more than 15-25% in interest rate. In the case of cars, the story is entirely different.

So who need not worry about interest rates? Car manufacturers have been faced with the challenge of rising inventory and have begun to lower prices but the consumer is not ready to bring in a new car in a hurry. The reasons for lack of enthusiasm are plenty but top among them is the uncertain future. If the salaried is not sure if he will have the same pay cheque for the next one year, the uncertainty is of a different kind for the self-employed who account for a good chunk of car buying population at this time of the year. For these entrepreneurs, receivables are mounting and cash is turning out to be a rare commodity. With the economic recovery threatening to take more time to return to normalcy, the entrepreneurs are not in a hurry to invest on new wheels.

It is in this background one has to view the economic packages being unleashed by the government. In an election year, the government is keen on reviving the sentiment which has taken a huge beating. The uncertainty, liquidity crunch and the lack of enthusiasm among consumers to loosen their purse strings is not having the desired impact and hence, the Union government has been pushed to get more aggressive with its goodies. That’s why now you hear about income tax sops on home loans, higher investment limit for Section 80c and there is even talk of the government pushing builders to offer steeper discounts. Banks have already been told to get back to lending rather than focus on government securities. In the past few months, banks have resorted to increased scale of treasury operations. Not surprising considering that government securities have become the most profitable option for improving bottom line. The focus on treasury has been an easy option for banks in an era of falling interest rates. As you are aware, the yield from government securities goes up in inverse proportion to the prevailing interest rates and the sharp fall in the last few months has helped the yield to be in the range of over 15%. Unless there is pressure on them to get back to lending, banks may continue to rely on treasury profits for their good health. Only government has the wherewithal to push them.

If you look at the returns of ELSS funds, it may not be heartening. But that shouldn’t stop you from investing in ELSS this tax planning season

December may be the month to relax at the work place with a string of holidays but many may not be allowed to if they have not completed the tax planning exercise. With the year almost coming to an end and with slightly over a quarter to go for the financial year, it’s time to focus on tax planning.

A number of products offer tax relief as they are covered under section 80 C but this time investors can have a higher allocation towards equity markets as equity markets have come off their highs in the last three quarters. That provides a good opportunity for fresh investors if they are looking at building corpus over the next 3-5 years. With tax planning instruments like ELSS (equity linked savings scheme) and ULIPs (unit-linked insurance plan) allowing exposure to equity, investors can look at these two options.

In the case of ELSS, options are plenty as almost every mutual fund company has the product under its portfolio. However, going by the past performance and investment strategy, SBI Magnum Tax Saver, HDFC Tax Saver and Franklin Templeton Tax saver can be your preferred choices as these funds have been consistent with their performance. While returns from some of these funds may not look pretty at present (if you were to compare 1 and 2 year returns), the fact is that equity markets at present is going through one of the challenging times. In addition, weakness in the market is a good opportunity for fresh buying and hence, allocate a portion of your tax saving fund into this product.

Besides ELSS, unit-linked plans can be another option for tax saving as it allows exposure to equity. The advantage with ULIP is that equity is not the only option and the investor has the option of switching from one fund to another. However, at current market level, equity can be a better option for long term investors. In the case of ULIPs, plan features are similar among various insurance companies, but costs such as allocation charges, administrative charges and policy charges are the ones to look out for. Here again, these charges can make a huge difference for those looking at insurance as a short to medium term investment option with the payment term being less than 10 years. In the long run, however, there is not cause for concern, as most companies have similar cost structure after five years.

Even when tax planning is a necessity for many, not many have the advantage of liquidity. For many fresh and young investors, tax deduction tends to bring a better relief than tax saving investments as they need not worry about the investment! Such investors can go in for monthly payment mode through SIPs for ELSS and ECS in the case of insurance. However, such luxury may not be available for last minute tax savers with the year coming to an end in the next four months. So, look for lump sum for the current year and from next financial year, make it a point to sign up for SIPs.

Another option for monthly saving is SIP in a general fund or a debt fund and the amount can be transferred to an ELSS fund at the time of providing investment details to the employer. While debt funds give the comfort of accumulation without risk, equity funds provide the element of opportunity of earning higher returns but with the baggage of risk. Go for an option that suits your risk taking abilities.