The Infrastructure Leasing and Financial Services (IL&FS) contagion is spreading. After mutual funds and non-banking financial companies (NBFCs), it is the turn of the exempt pension funds to be worried about their investment in bonds from the beleaguered institution. The story is: as non-performing asset-laden banks dried up lending to firms, these companies turned to other sources of money as a firm needs working capital to keep the wheels of business turning. Money comes from two sources—extra funds that other firms have and household savings. Institutions such as banks, mutual funds, insurance firms, pension funds, and NBFCs act as intermediaries between households, who are the lenders, and firms who are borrowers. In the IL&FS case, there are bonds that have not kept to the interest payment schedule and were, thus, classified as below investment-grade by credit rating firms. Once that happened, the exposure to such bonds held by mutual funds came to light. Next came the exposure of NBFCs to these bonds.
Livemint decodes the implications of tax proposals in interim budget 2019 with personal finance expert Monika Halan. The budget proposed rebates for all those with taxable income of up to Rs. 5 lakh per annum. Tax burden has also been reduced due to the proposed increase in standard deduction from the earlier Rs. 40,000 to ₹50,000. Watch the full video where Monika Halan unpacks how the tax proposals will impact your pockets.
The 8,153-word speech by finance minister Piyush Goyal, who was stepping into the shoes of the ailing Arun Jaitley, had some giveaways and some promises to both India and Bharat. But if you look for a subtext, it is this: “We inherited a struggling economy that was crying for structural reform after years of policy paralysis. Our macro report card is good—inflation is down, deficit numbers are within a whisker of the glide path recommended in the FRBM Act and the economic growth numbers are strong. To fix the micro, that means things that will make a difference in your life, give us another chance. And, by the way, to help you help us, here are some rewards targeted at those who most need them.”
Ask any average middle class person what they want from the Budget and the answer is lower prices and less tax. In a way these are contradictory goals because lower tax rates could mean a revenue shortfall. A tax revenue shortfall can cause a government to borrow more, causing the deficit to increase and that could cause a price rise. Didn’t make the link? Let me try and unpack this. The annual budget presentation is a financial statement of the central government where the collection of revenues and its spending is laid out. The government gets most of its revenue from taxes (both direct and indirect) and about one-fifth from non-tax sources. Direct taxes are paid by companies and individuals under various heads (income tax, tax on house property, tax on profits and so on). Of the total revenue, income tax on non corporates (that means us) is about one-fifth of the total revenue for the year. Corporations pay a bit more than we pay. Almost half of the revenue comes from indirect taxes—it used to be excise and sales tax, but now this revenue comes through goods and services tax (GST). The shortfall in revenue over what has to be spent is called a “deficit”. This deficit gets funded largely through the money the government borrows.
The year 2018 taught us that buying last year’s winner is not a good idea. Several years of good returns, a successful ‘mutual funds sahi hai’ campaign and the spread of the SIP culture brought plenty of first-time investors into equity mutual funds. The SIP book grew 50% over calendar year 2017 and another 20% in 2018 despite choppy markets. New investors rushed in and some of them went straight to the winners of 2017—the mid- and small-cap mutual funds. Some of these funds had given returns of over 40% in 2017 inducing investors to throw caution to the winds and rush to the risky part of the equity market. Investors made two errors. One, bought last year’s winner in 2018. Two, allocated all their equity investment to the past winner.
n this episode of Money With Monika, personal finance expert Monika Halan talks about the benefits of choosing a mutual fund over direct stock investments. Investing in mutual funds is far safer than putting all your money in one stock, she says, as the chances of failure of an entire basket of stocks are next to none. In short, hedge your bets for maximum returns at minimal risk. Monika Halan is consulting editor of Mint and author of ‘Let’s Talk Money’.
The year 2018 was when we all learnt some hard money lessons. We learnt that stock prices that go up very fast can zoom down too. We learnt that debt funds are not fixed deposits and returns are not assured. We learnt that real estate revivals can take years and years, and 2018 was not that year. We learnt that governments can change the rules of the game around taxation making it better or worse for you. 2018 was the year in which we learnt the meaning of risk.
There were four kinds of risks that we took home this year. First, the risk of chasing high returns. Many of you may be holding a portfolio that has mostly small- and mid-cap funds. That’s because you saw the 40% plus one year returns in 2017 and went all out to harvest that return. I can remember plenty of conversations with first-time mutual fund investors who had jumped right into the deep end with all their money in the risky part of the market. Warnings would fall on deaf years as the return chasers thought the SIP was their safety belt. 2018 saw a bloodbath in both the mid- and small-cap categories. Investors are staring at an average loss of 12% in mid-caps and around 18% in small-caps. The worst small-cap funds have lost almost a third of the invested value—or ₹1 lakh has become ₹70,000. If you had your entire money in small- and mid-caps, your portfolio is bleeding. But if you had a mix of large-cap, multi-cap and ELSS funds, the red will be less stark. Just buying last year’s winner is not a good strategy for mutual fund investors. 2018 told us that. Understand what a ‘diversified portfolio’ means and implement it in your money box.