Demonetization - Impact on investments & returns!
With the dust settling down on the demonetization of Rs.500 and Rs.1000 notes (w.e.f 08-Nov-2016), the next question on everyone's mind is, "Does it affect my returns?". This blog explores demonetization's effect for savers who are also largely tax payers.
Financial market
With over Rs.8.45Trillion deposited into the banks as of 27-Nov, the system is flush with liquidity. A portion of this money is expected to be loaned out for businesses and individuals to start the investment and demand cycle. However in the immediate next 2 quarters, demonetization will keep demand subdued.
RBI is currently in a rate cut cycle with further cuts in the offing. This is causing bonds to be the favorite investment pick among analysts (as bond prices rise when rates fall). However, the rate cut cycle is not a given - the quantum of rate cut is primarily dependent on inflation. Although domestic factors impacting inflation are benign with structural changes in supply side and a good monsoon, global factors such as rise in price of crude (due to a recent production cut agreement by OPEC countries) and depreciation of the rupee (due to fed rate hike in Dec/Jan) are not so benign to India's inflation expectations. Result - your petrol prices could jump up quickly!! This in turn could increase inflation and put a spanner in RBI's rate cut cycle and might affect bond markets!
Impact on Investments & Returns
With bank fixed deposits offering interest rate of 6.25-7% p.a, post tax returns for savers would be about 4.5%, lesser than the 5.7% inflation. Real estate is stagnant since 2013 and may give just a 2-3% rental yield - with price correction in offing, capital appreciation over the next 3-5 years too may not be spectacular. With the impending US fed rate hike, the greenback will return to its helm, leaving a lacklustre outlook for gold . With the exception of FDs, rest of the assets cannot be quickly liquidated as well. Many people are stuck with the "Asset Rich - Cash Poor" syndrome, as Indians have 60-80% of their portfolio in realty.
What next? - (Liquid) Capital Assets
While realty and gold are capital assets, they are quite illiquid. From the point of view of returns, growth, taxation and ease of management, it is prudent to move to capital assets that are liquid. Financial instruments such as Mutual Funds and Equities are capital assets that are tax efficient and readily liquifiable to meet your liabilities. In the next blog, we shall see why a saver should consider moving to financial capital assets in detail..
Financial market
With over Rs.8.45Trillion deposited into the banks as of 27-Nov, the system is flush with liquidity. A portion of this money is expected to be loaned out for businesses and individuals to start the investment and demand cycle. However in the immediate next 2 quarters, demonetization will keep demand subdued.
RBI is currently in a rate cut cycle with further cuts in the offing. This is causing bonds to be the favorite investment pick among analysts (as bond prices rise when rates fall). However, the rate cut cycle is not a given - the quantum of rate cut is primarily dependent on inflation. Although domestic factors impacting inflation are benign with structural changes in supply side and a good monsoon, global factors such as rise in price of crude (due to a recent production cut agreement by OPEC countries) and depreciation of the rupee (due to fed rate hike in Dec/Jan) are not so benign to India's inflation expectations. Result - your petrol prices could jump up quickly!! This in turn could increase inflation and put a spanner in RBI's rate cut cycle and might affect bond markets!
Impact on Investments & Returns
With bank fixed deposits offering interest rate of 6.25-7% p.a, post tax returns for savers would be about 4.5%, lesser than the 5.7% inflation. Real estate is stagnant since 2013 and may give just a 2-3% rental yield - with price correction in offing, capital appreciation over the next 3-5 years too may not be spectacular. With the impending US fed rate hike, the greenback will return to its helm, leaving a lacklustre outlook for gold . With the exception of FDs, rest of the assets cannot be quickly liquidated as well. Many people are stuck with the "Asset Rich - Cash Poor" syndrome, as Indians have 60-80% of their portfolio in realty.
What next? - (Liquid) Capital Assets
While realty and gold are capital assets, they are quite illiquid. From the point of view of returns, growth, taxation and ease of management, it is prudent to move to capital assets that are liquid. Financial instruments such as Mutual Funds and Equities are capital assets that are tax efficient and readily liquifiable to meet your liabilities. In the next blog, we shall see why a saver should consider moving to financial capital assets in detail..
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