Reforms, RBI give some help to your finances

Last Updated: Sun, Sep 23, 2012 04:40 hrs

In the past couple of years, investors have been grappling with negative to negligible returns from stocks and mutual funds. However, things seem to have changed since the beginning of this month at domestic-cum-global levels. Over the last 15 days, the indices have jumped by close to 1,500 points thereby growing investor wealth by a good measure. Globally other countries too have initiated various stimulus measures to ease up the economy.

Monthly budgets expensive
Recent hikes in petrol prices and now diesel too will have a major impact on the monthly budgets. With inflation showing no signs of cooling-off, individuals would need to keep a close watch on their expenditure budgets. In addition to the fuel bills going up, these hikes would have a cascading effect on the prices of essential commodities like vegetables, milk, etc. The liberal quantitative easing programme announced by the United States has the potential to indirectly cause fluctuations in food commodity prices, especially in emerging markets like India.

In such a scenario, families will feel the strong need to keep a tab on their spending plan in order to maintain the balance between savings and expenditure. The best way to achieve this would be by maintaining monthly budgets and keep reviewing the same from time to time, say fortnightly, to understand the impact of these factors on one’s budget. Based on these results, the Emergency Fund needs to be reviewed and revised upwards adequately.

Borrowings cheaper
With the recent cut in CRR by RBI, there is a strong possibility of banks reducing their lending rates; implying lower EMIs for new borrowers and also for existing ones. Over the last couple of weeks, some banks have already taken the lead to reduce rates – both on loans as well as on deposits. Although the reduction in EMI will be welcome for borrowers, the same may get offset by the lower yield on bank deposits.

Borrowers with available lump sum money and looking to prepay loans should evaluate the potential effective rate of interest on the loans with a time horizon of next 12-15 months. Based on the results, they could rethink about prepaying if the effective borrowing rate is lower than the realisable investment yield.(MARKETS GET A BOOST, GOLD CORRECTS)

Equity investments
Already a lot of retail investors have developed a feeling of having ‘lost-out’ in the recent rally.

While greed for higher returns may persist, fear of a possible downside should also be managed well. SIP investments should be continued, while lump sum investments may be averaged out. Also, people who have been disciplined with their investments over the last 1 year should also relook at their portfolio and look for opportunities to book profits.

It is also a good time to review ones stock portfolio, prune out the non-performing and dud stocks in the portfolio and make way for some good company shares in the coming days.

Fixed instruments
Interest rates being on a downward curve, investors should look to lock-in money at these rates for the next 1-2 years in fixed income securities. Bank FDs and reputed company fixed deposits would be a good choice. Short and medium term debt based mutual funds will also be a good choice. Gilt funds are an ideal choice for investors looking to reap benefits from the falling interest rates. Some gilt funds are already averaging approx. 14% returns over the last one year. Gilt securities being ranked high on the safety parameters, investors can look to earn modest returns from these funds over the next 12-15 month period.

Gold has continued to show splendid returns over the lastsix months and lots of people are bullish on this commodity. It is difficult to predict the movement of gold prices, as it depends on global factors as well. Investors who had bought gold at lower levels, could do well to do some profit booking at current levels. For people, looking to invest, it is advisable to set-up a systematic savings strategy for investing in the yellow metal. Lump sum investments may be strictly avoided.

It is essential to keep reviewing one’s portfolio and the impact of these initiatives at a micro level.

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