Hurdles to cross in the new year

The outlook is sombre. But it will be important to keep your cool to handle tough times.

The passing year has left investors little respite...rising uncertainty in the country's politics, rising consumer prices, a Europe crisis. The only consistency was in negative surprises like the continuous rise in petrol prices and other essential commodities and slowing in corporate profitability, not to mention the Sensex correction. With 2012 just round the corner, what should an investor look forward to?

Equity markets
Barring occasional upsides, the equity markets never really helped investors earn much during the current year. Keeping in mind various domestic factors like slowing corporate performance, belligerent inflation, a depreciating rupee and indecision on reforms at the government level, there is little reason for markets to cheer. Globally, too, with the Europe crisis seeing no resolute solution and other countries facing the heat, this is adding oil to the fire. These factors are not expected to see any quick solution in early to mid-2012.

So, it will be in investors’ own interest to keep expectations from equity markets at low to modest levels. On the other hand, thing long-term, as in investments done with a five-year horizon. History shows that investments in even the worst periods have yielded results. So, continue investing for the long term, without paying attention to the short-term volatilities that may spill over into 2012.

Fixed income investments
The year definitely offered investors in this category with plenty of options, such as high interest rates from banks, companies and also the non-convertible secured debenture issues by various companies. The last leg also saw some revision in small savings rates, with these becoming market linked. Though the real returns from this segment continued to be negligible to negative on account of high inflation, it definitely provided some cushion, especially to the retired segment.

2012 is expected to see interest rates getting softer, in an effort to spur growth in the economy. This is music to any borrower’s ears and fixed income investors would do well to anticipate and act on it. An investor looking to build and maintain a fixed income portfolio for the next two-three years should look to lock-in most of the portfolio into deposits at these rates, wherever options are available. Any deposits at lower rates should be re-booked during the next few weeks at the prevailing higher rates.

Debt fund investors should be ready with strategies to shuffle their portfolios from short-term to medium and long-term funds, to optimise returns. 

IN 2012

Equities

* For SIP investors, continue with the SIPs during 2012, do not stop to catch lower levels.

* For existing investors, if equities are for at least 5 years, may choose to hold on investments

Fixed income segment

* Lock-in long term money into bank deposits for the maximum tenure available

* Keep options open to move money from short term funds to medium-term and long term funds

Job uncertainty

* Stay focussed on the job / business.

* Try acquiring new skills / upgrade existing skills

Direct Tax Code

* Benefits to enjoy: Higher income exemption limit; Higher reimbursement of medical expenses

* Loss in benefits: Lower deduction against rental income; Withdrawal of leave travel allowance for salaried individuals

Job uncertainty
The fears about corporate profitability directly translate to fears about job prospects or a slowing in salary growth. Individuals operating small to medium businesses may also feel the slowdown.

It will be worth the cause to adopt a defensive stance on investments to provide for contingencies and use every opportunity to build that emergency fund. It is important to be in control of the situation. This is also a good year to start learning a new skill. It will provide a route to an alternative career or even help in impressing upon the existing employer about the intention to learn and acquire new skills.

Tax Code
The new tax code seems set to be introduced from April 1,l 2012. Individuals should be ready to welcome the new legislation and also look to manage any transition required in investment strategy.

A few instances where individuals may look for gains from the new legislation (from the last draft of the Bill) are:

a. Higher dividend realisation from mutual funds on account of lower dividend distribution tax on equity funds;

b. Shorter time horizon for qualifying an asset as a long-term capital asset (a year across all categories);

c. Higher exemption limit and higher income slabs, with the highest rate of 30 per cent being raised to annual income above Rs. 10 lakh;

d. Tax planning for salaried individuals in terms of the reimbursement for medical expenses available up to Rs. 50,000 p.a.

And, for some loss in benefits like:

a. Lower deduction (@ 20 per cent, instead of 30 per cent) against rental income;

b. Leave travel allowance exemption being withdrawn;

c. Long-term capital gains (other than those exempted from tax) being taxed at applicable rates, instead of the existing 20 per cent.

Individuals should take up additional measures in the first part of 2012 to ride on the advantages, while providing for the disadvantages.

Behavioural
As 2012 may not be as optimistic, it is important that investors try to improve certain behavioural aspects on investing.

i. Stay away from focusing only on negatives or spending much time keeping a tab on the ups and downs in the markets.

ii. Contrarian thinking during these times will help.

iii. Many a time, doing nothing also helps, especially with all those negatives calling for action.

2012 could well bring along a lot of surprises or shocks for investors, but what you make out of it will make all the difference. Maintaining the right equilibrium between expectations and reality will help the individual make better long-term decisions and accomplish objectives more meaningfully.

The writer is a certified financial planner