The D-Street Band

What you want to do is to claim the 80C deduction while investing as less as possible and without committing to long lock-ins. The first two entries (education costs and home loan repayment) don't involve any outgo, and are incidental benefits, and so you should max them. Likewise the EPF, which is deducted from your salary. PPF slips in before ELSS because it doesn't have comparable alternatives, whereas ELSS does, in the form of conventional diversified equity funds. Even if you exhaust your Rs 1 lakh limit, you can always invest in diversified equity funds to get your desired equity exposure.

Market-friendly
In spite of the fact that the market is trading near its historic high, equities still look good. What the market wanted was continuity in reforms and policies without any nasty surprises. It got just that. Says Devesh Kumar, head of research, ICICI Securities: "It addresses the crucial issues facing India—infrastructure and rural development, and provides stimulus for economic growth."

It creates conditions for investment that makes sustaining annual economic growth of 6-8 per cent a realistic possibility. Once again, the focus area is infrastructure which tends to have a trickle-down effect on the economy. India Inc too has reason to be happy. With the effective corporate tax rate cut from 36.6 per cent to 33.6 per cent, companies will see their profits increase by about 5 per cent.But there could be some surprise as depreciation rates too have been reduced and that could offset the overall tax benefit.

But more than these small cost savings, what should excite companies—and therefore you, as an investor—is the continuing prospect of buoyant demand which will ensure that the expansion plans that firms are currently undertaking lead to higher revenues and profits for them. By reducing taxes, Chidambaram is putting more money in your hands. When you spend it to buy a firm's products, you increase its sales and profits, which should lead to the company's share price rising.

With profits projected to grow 20 per cent or more, the bullish undertone in the market is expected to continue (see graphic: Why the Market Will Stay Buoyant). Post-budget, several brokerages have scaled up their Sensex target for the next 12 months to 7500. Even at those levels, it is valued at just 13 times its earnings for 2005-06 which shows the rally in the market is backed by performance.

It is also backed by demand. FIIs are pumping in money. Pension funds could make an entry soon. Chances are, small investors might channelise a good chunk of their Section 80C investments into ELSS.

Higher transaction costs
A minor irritant for the equity investor is an increase in transaction costs from June 1. The securities transaction tax (STT), introduced last year, has been increased (see table: Equity Trades Get Costlier). For the small investor, who does delivery-based trades and that too not frequently, and who targets a fat profit margin, the increase is negligible. Illustratively, if you sell units worth Rs 10,000, besides an exit load, if applicable, you currently paid STT of Rs 15. Now, you will pay Rs 20.

The one constituency of investors who have reason to feel hard done by is day traders. They speculate on profit margins of as thin as 0.04-0.10 per cent. With an STT of 0.02 per cent, their margin of comfort reduces, but not by an amount that puts them out of business. Says Andrew Holland, executive vice-president, DSP Merrill Lynch: "FIIs pay a transaction tax in most markets. Even after this increase, the rates are not high."

New investment options
Budget 2005 also offers a sneak preview of new options that are likely to become part of your platter in the foreseeable future. Chidambaram pressed for advances in two specific areas—launch of gold funds and revival of the secondary market for corporate debt paper.

Gold exchange-traded funds (ETFs) will make it easier for you to invest in gold. Says C.J. George, managing director, Geojit Financial Services: "Conservative investors like to allocate some portion of their portfolio to gold. Gold ETFs are a progressive idea, as they accommodate investors with small outlays."

The one segment in desperate need of progressive thinking is the corporate debt segment on stock exchanges. On most days, not a single deal is struck. Since institutional players are networked, they are able to meet their investment needs. But the absence of a market means this investment option bypasses the small investor. Chidambaram wants to kick-start trading in corporate bonds and also subsequently offer securitised debt and mortgage-backed securities on the same trading platform. Says A.K. Sridhar, chief investment officer, UTI Mutual Fund: "Among the many positives for the capital market, this commitment to develop the corporate debt market is the biggest." If it pans out as planned, expect more options in the corporate debt space.