After PC's Budget...

I was planning to continue with our exploration of IPOs, but now with PC's budget proposal, I thought it better to put together things related to the Budget'05 for all of you out HERE in India. So, what if I have to stop a series and put this. We'll go ahead...

PC has really done a great help to India by allowing "Investment" for Tax-Saving and not just Savings for Tax-Saving. Yes, if you look at our Economic Survey, one thing we should take pride in is that our savings rate has gone up to 28%. It's a good sign but still we are lagging behind our dragon friends who save around 40%! But that is not the issue, the concern for many economists is that our savings rate is 28% but our investment rate is 26%. What's the big deal in that? Well, in simple terms we can put it as: the 2% gap is the money going outside India- "Our" savings are being used to invest "outside" our country. The important thing from the economist's point of view is, "investment" matters much more than pure savings.

After this grave economic theory, :-) let me come back to the main point of this issue and that is how your investment decisions shall change if PC's budget proposals are accepted by the Indian Parliament.

What are his proposals? Well, you all must have learnt by this time that your tax savings limit is now Rs. 100 thousand. There is nothing much on the face of it. Even at present we have tax savings limit at Rs. 110 thousand. Then, what is the excitement all about ? It's this; now you can save and invest "wherever you want" without any specific cap and the best part is, like every businessman who gets Tax Benefits for investing in his or her business you will also get the same benefit for your investment!

What this means is that simply put, any amount upto 100 thousand that you invest, will not be counted as your INCOME. ie if you fall under the highest tax bracket (30 %) then you can save 30 thousand from your TAX liability.

So what good is 30%. Well, here's the Vibe Challenge to you all: Show us "one" existing investment where you can get 30% with NIL risk! Impossible? Well that is what PC has given us and now its our DUTY to make maximum benefit out of it.

I believe we should work it out as follows:
First invest a 100 thousand for saving your taxes and after that if you have anything more put it in pure STOCKs and IPOs; but first, just invest to save your taxes.
A much better thing to do is to put it in pure STOCKs whatever you save in TAXES .

Here is my model portfolio to take full advantage of benefits given to us by PC. ( I am assuming that
> you are earning Rs. 400 thousand in all
> you can save a 100 thousand from that and
> you want to buy a Handy Cam by April, 2006)

1. Invest 20 thousand in your EPF account. (A safe bet for your retirement, which comes with NIL risks and till now ZERO taxes)

2. Buy a pure insurance product (in India it is known as a Term Plan) to secure your life for your dependents. Choose a plan for which you have to pay a premium of about 5 to 10 thousand. Remember this is pure cost and NIL investment. As these plans just cover risks and do not give any return, rather they eat up what you put in them. But it is very important to take these plans if you have dependents.

3. Here is my favourite: ELSS. In one of the previous issues I have talked about them. Now PC has allowed you to invest upto 100 thousand in them. Put around 4 thousand in them EVERY MONTH. A better thing is to take two seperate ELSS plans from two different mutual fund houses and join in their Systemetic Investment Plans (SIPs) and invest in both of them 2 thousands each. This shall earn you a return of 15% over 3 years (which is the lock-in period of ELSS) CAGR.

4. Now, what ever is left, put it wherever you can. I advice you to put it in debt but if you want better returns put left over money too in ELSS. Those who want to play safe should invest in any of these: NSS, NSC, PPF, Infrastructure Bonds, Bank Deposits (Yes, you can even invest in banks and claim Tax Relief), Company Deposits etc. Choose the investment by considering when you will need that money. The higher the period of investment the higher the return.

5. Buy a Handy Cam in April, 2006. But how ? Well you already have 30 thousand extra which you have saved from taxes. Use it either to INVEST in STOCKs or just buy that cute little Handy Cam. Well this is what experts call financial planning.

And dont forget to thank PC for your Handy Cam. :-)


-jk sherdiwala


At 3:34 AM, Anonymous nitin said...

congrats on ur prediction :-)


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