The Union Budget 2018 is going to have some far reaching implications for various asset classes. While it will surely impact your financial plan, the bigger question is how it is going to impact your investment mix. Your investment mix typically consists of equity, equity funds, debt, debt funds, liquid funds, realty, gold and other asset classes. The budget 2018 is likely to have larger implications for most of these asset classes as the finance minister will look to sign off with a bang. Here are 6 major asset class implications..
The big story could be all about equities
The big story of the Union Budget 2018 could be all about equities. A higher rate of inflation means that you need to have more wealth creation ideas to make up for the higher inflation. Equities could also get a boost because bond yields are going up and that is leading to capital losses on bond portfolios. Then there is the all important tax angle. It is expected that Section 80C will be extended to direct equities, apart from equity funds. Also there could be a separate limit carved out for equity and ELSS Funds. In addition, the Section 54EC definition is also likely to be expanded to include assets like infrastructure equities and infrastructure funds. All these factors will justify greater fund flows gravitating towards equities as an asset class.
Look to calibrate your exposure to long term debt funds
This could be the big challenge for your investment portfolio. While most of us look at equities for long term wealth creation, it is debt that provides stability of returns and regularity of returns. But if your portfolio is skewed towards long term debt funds then you need to do a rethink. Remember, long term debt funds are the most vulnerable to a rise in interest rates and that is a distinct possibility with the US planning to hike the Fed rates by 100 bps during the year. Also, the bond yields on the 10-year G-Secs have gone up by over 50 bps in the last 3 months and are hinting at a distinct possibility of a rate hike. Too much exposure to long date G-Sec funds may not be a good idea in this scenario.
Reduce your exposure to liquid assets to the bare minimum
As rates continue to rise in the bond markets, as it looks likely at this point of time, the government and the RBI will ensure that the liquidity in the financial system is sufficient. Since rates at the short end of the yield curve are more vulnerable to liquidity than to inflation, we could see rates on liquid instruments come down. Therefore, the liquid funds may lose that slight advantage that they currently enjoy over bank savings account. Be careful about parking your money in liquid funds during the year as it could yield lower rates of return in the current year.
Realty could be back with a bang in 2018
Realty is back in the reckoning as an asset class due to a combination of demonetization and RERA. But the budget could also see a major boost for realty as an investment option. The government is likely to increase the exemption limit under Section 24 for the interest on home loans. The current limit of Rs.200,000 does not factor the realty price situation in most of the large and medium sized cities. Additionally, the government thrust on housing-for-all and low cost housing is likely to throw many more options open. With the realty business being largely cleaned up after demonetization, the time could be ripe for fresh inflows into realty. It may emerge as a distinct asset class once again.
Gold could be attractive for numerous reasons
Why could gold become attractive in 2018 and why would the budget be of any help? We see quite a few reasons. Firstly, we see the import duties of 10% on gold and the GST of 3% on gold being brought down to make it more competitive as an asset class. That would prop up demand for gold in India. Secondly, we expect the government to come down with restrictions on the use of Bitcoins, especially considering that Korea and China have already taken the lead. Remember, both gold and Bitcoins are non-fiat currencies and actually compete with each other. Bitcoin has already shown the downsides of volatility by correcting more than 50% from its peak in less than 2 months. Any restriction that the government announces on Bitcoins in the budget is likely to favour gold as an asset class.
Keep your attention span wide to include other asset classes
But more importantly, there are a lot of new asset classes that will emerge in this budget which you may not have considered seriously in the past. Products like REITS, InvIT, structured products, Fund of Funds are all asset classes you may not have considered in the past. We expect the budget 2018 to focus on many of these lesser known asset classes and make them more amenable and available to the investors at large.
To cut a long story short, this budget will have huge takeaways for your investment mix. Clearly, equity as an asset class is likely to emerge as a winner from the Union Budget even as the doors will be opened for newer products. Be a little cautious this year on debt as it is likely to undergo subtle changes. A lot will depend on how the government deals with the interest rate scenario!