Budget 2017 was a great balancing of expectations. The market on the one hand had wanted a tightened fiscal deficit and on the other, it was expecting a fiscal push for infrastructure investments as well as tax breaks in hands of consumers and corporates. Looking at those demands, the finance minister has pulled out a magic trick from his hat and managed to pull off a hard-to-please Budget.
The budget honours path of fiscal prudence and provides for a fiscal deficit of 3.2 per cent of the GDP for FY18, down from 3.5 per cent in FY17. Not just that, the tax rate for MSMEs (companies with turnover below Rs 50 crore) has been reduced to 25 per cent from 30 per cent. This is likely to benefit around 96 per cent of the companies’ filing tax returns.
From FII point of view, concessional with-holding tax of 5 per cent on ECB and masala bonds has been extended till June 30, 2020. This could help turn around debt FII flows. The all-time high divestment target will require skilful management and listing of companies like IRCON can help in that direction.
From debt market point of view, the net borrowing levels have remained largely contained. This has created headroom for further rate cuts by RBI later this week. Moreover, the surplus liquidity due to demonetisation is also likely to find its way into the banking credit line over a period of time.
All this is likely to keep the interest rates in the economy low and make commercial borrowings by private sector very competitive. Existing duration fund (long-term bond funds/gilt funds) investors can continue holding their position for a few months more to take the full benefit of easing yields. Fresh allocation can be made to good credit/accrual funds with a three year horizon as these offer attractive spreads over gilt and high quality bonds albeit with a lower volatility.
While choosing such funds, please give importance to the overall portfolio quality rather than just the yield to maturity. Investors with investment horizon of six months and below can consider allocating assets in ultra-short term schemes to benefit from higher potential of returns than traditional deposits such as bank fixed deposits.
The understated aspect of Budget has been the impetus it has towards creating productive assets. The Budget has increased its capex allocation by 11 per cent. Other than that, nearly Rs 3.96 lakh crore has been allocated to the infrastructure sector with particular push towards roads, railways and shipping. Impetus on affordable housing is also commendable. This should help create significant employment for unskilled workers and help support local industries such as cement, paints, tiles, etc. Not only that, it would also help the banking sector in allocating credit in retail housing loans which are relatively safer.
Retail investors should participate in equity markets through mutual funds rather than taking the direct route and have a long investment horizon of at least five years. However, since the markets have run-up quite a bit, I would suggest investors to invest around half the money through SIPs in diversified equity schemes with a five-year horizon and the rest of the corpus can be placed aside for event-related volatility in the markets such as US Fed raising interest rates, negative surprises in quarterly earnings season, UP election outcome, etc.
The author is MD and CEO, Kotak Mutual Fund