Tweaking budget & investments in tough times

[suguhopes]

As Indian investors were getting used to the benefits of a growing
economy , global oil prices decided to play spoilsport. Inflation,
fuelled by high oil and commodity prices, is slowing down our economic
growth.

Attempts to control inflation are pinching consumers’ pockets.
Avoiding high interest rates on loans and reducing monthly household
budgets looks impossible. Stock markets, which usually give good
returns, are down, too. Still, with strategic investments, you can
tide over a tough period . And prudent investments can cushion the
rise in equated monthly instalments (EMIs) on loans. Here’s how.

Fixed deposits:

Better returns on bank fixed deposits is the positive fallout of
Reserve Bank of India’s (RBI) recent rate hikes. Most FDs will now
yield 10% to 11% a year. But that’s little comfort to investors, as
inflation is expected to touch 12% and eat into returns.

Your strategy should be to encash at least part of your FDs and pay
off loans, or make part prepayments, if their interest rates are being
hiked. Topping your list should be expensive debt, like consumer
durable loans and credit cards. Shares: A likely economic slowdown is
worrying our markets.

Rising crude prices and political uncertainty over the Indo-US nuclear
deal have made markets jittery. Mutual funds’ net asset values (NAVs)
have plunged, as have the number of corporates announcing dividends
and bonuses for the first half of 2008. Experts are not ruling out a
further fall in stock markets.

The most strategic stock investments now would be in sectors which
would suffer the least from an interest rate hike. Sectors like
pharmaceuticals and information technology (IT) benefit from rupee
depreciation (due to rising oil prices and the weakening domestic
fiscal situation). Using the same logic, interest-sensitive sectors
like banking, real estate, automobiles, and infrastructure are
expected to underperform in the near term.

On the flip side of the stock market decline are the bargains: good
stocks may not be available at current prices in the future. For
instance, despite the interest rate hike and the bleak outlook for the
banking sector in the near term, several stocks are still being
recommended.

“Although banks will remain under tremendous pressure for the next six
months, interest rates will eventually come down in the medium term.
Valuations of some of these interest rate-sensitive stocks are
attractive now. These stocks can be expected to give above average
returns in the next two to three years,” says Hitesh Agarwal, Head,
Research, Angel Broking.

If you can study the fundamentals of individual stocks, investing
directly is better than investing in mutual funds whose NAVs are
falling. If you must invest in mutual funds, go for diversified rather
than thematic schemes. A fund manager dealing with diversified funds
can switch sectors if one is underperforming. In thematic funds,
performance depends on a particular sector. Also, with falling NAVs,
you’d need to keep revisiting your investments and switch schemes if
necessary.

Gold has long been touted as a hedge against inflation. But neither
gold nor any other commodity have been able to beat stocks where
returns are concerned. This is in keeping with the logic that higher
risks means higher returns. If you still believe that commodity
markets are the place to be in, heed the experts. “Timing will be
crucial here,” says Prasad Baji, commodity analyst at Edelweiss
Capital.

“Investors would have to watch inflation and interest rates closely,
as any cooling off could lead to a switch from commodities to
equities. So, they’d have to exit commodities before equity prices
firm up.” Whatever strategies you use, don’t expect to make a quick
buck. Get into stocks only if you’re willing to take a long-term and
vigilant view.

Home loans:

Since RBI hiked interest rates, banks have raised rates by 50 to 75
bps for existing and new home loan customers. Borrowers have three
options. One, encash investments or use savings to pay off some of the
principal loan. Two, opt for a higher EMI if you have the disposable
income. And three, extend the loan tenure. Paying off part of the
principal is the best option, if you have enough money , as your EMI
could remain the same.

If you can’t pay a large amount immediately , but are sure of
maintaining a higher disposable income each month, you can get your
loan restructured and pay a higher EMI each month (this is in addition
to what the interest rate hike has added). By managing to pay an extra
amount now you can avoid the option of increasing the loan tenure.

Though prepayment looks tempting, using a personal loan or credit card
loan to prepay a home loan can be expensive. Home loans will always be
cheaper than other loans. An often repeated advice is to avoid
increasing the tenure of a long-term home loan (15 years and above).
But if you have already used your savings, this may be the only option
left to keep your monthly expenses within the limit.br>
An extension in the tenure period will ensure a lower or at least the
same EMI being paid each month. Also, hope the government works out
means to ease the inflationary and interest rate pressures.

Drawing up a monthly budget that maintains a fine balance between
savings and expenses was never an easy task. With inflation climbing
this task has become even more difficult. Your strategy should be to
add some amount to the savings pool. After this, if you still have
surplus money for investments , go for schemes that give compounded
growth.

Brace yourself to cut expenses on all fronts. While buying essentials,
pay cash and avoid credit cards. This will help you get a better deal.

RBI Governor YV Reddy is confident that inflation will stabilise by
September-October 2008. Until that happens, Indian consumers and
investors have no option but to match the rising costs with their
budgets. Prudent fiscal management can help you get through these
tough times.


N.Sukumar
Research Analyst