Where Should Mutual Fund Investors Invest Now?

A lot of expectation from the interim budget in an election year is quite obvious. With an eye on elections, the govt has walked a tight rope between populism and fiscal prudence, keeping the Budget 2019 balanced towards boosting consumption in the rural and urban economy, along with a mild boost to the real estate sector.

Focus on Boosting the Consumption Economy

As expected in an election year, the government has proposed reforms for benefiting the farmers and those in the low to the middle-income category. Budget reforms to ensure higher incomes in the hands of people at the bottom of the pyramid are also in line with the Govt’s focus on boosting the consumption economy.

The tax rebate of Rs. 5 lakh p.a is indeed a big relief. An individual with a taxable income upto Rs. 5 lakhs need not to pay any income tax. This also means that one earning more than Rs 5 lakhs, say upto Rs. 7 to 7.5 lakhs, can incorporate the tax-exempted investments such as ELSS, Medical Insurance, NPS, Provident Fund, etc to reduce his/her taxable income to Rs. 5 lakh, and can be in the ‘no tax paying’ slab. This would benefit approx. 3 crore taxpayers in the coming fiscal year.

Further, taking a step towards the Govt’s vision of doubling farmers’ income by 2022, the budget has proposed an annual income of Rs. 6000 for farmers holding up to 2 hectares of cultivable land.

To give a boost to the real estate sector, now the owners of the 2nd self-occupied residential property have been relieved from paying tax on notional rent. Also, tax on capital gains from the sale of a property can be saved by investing in up to two properties.

However, the budget doesn’t hold much delight for the medium to high-income earners, as tax exempted limit, presently at Rs. 2.5 lakhs and tax deduction percentage of 5%, 20% and 30% continue to be the same. The only solace for salary earners, having a total income in excess of Rs. 5 lakh is the increment in standard deduction from Rs. 40,000 to Rs. 50,000.

Fiscal Deficit

The boost to consumption economy initially gave a positive reaction of the equity market, but the optimism faded once the fiscal deficit figures were known. FY19 fiscal deficit has been revised upwards to 3.4% (vs. 3.3% as per BEFY19) while the target for FY20 has been kept at 3.4% too. In absolute terms, the FY20 fiscal deficit is likely to grow by 11% to Rs. 7.04 trillion, while the gross and net borrowing plans have been pegged at Rs. 7.1 trillion and Rs. 4.73 trillion respectively, growing at 24.3% and 11.9% respectively. Though this marks a shift from the fiscal consolidation path that this government has followed so far, the same needs to be viewed in the context of an election year. Part of the rise in FY19 fiscal deficit can also be attributed to the Rs. 1 trillion shortfalls in CGST collections. Nonetheless, with the Nifty India Consumption Index rising by 1.9%, the markets closed higher by approx. 0.6%h. The reflationary undertone of the budget also led to a 0.5% rise in Gold ETFs.

However, before being critical about the Govt’s fiscal slippage, one needs to consider the fact that in 3 months it has general elections to attend. In light of this, keeping the fiscal deficit at 3.4% of GDP shows that the government is still focused on maintaining fiscal prudence and macro-economic stability. Another fact that fades down this slippage is that in last 5 years, the Govt has succeeded in bringing down retail inflation from double digits to an average of 4.6% and narrowing fiscal deficit from 4.8% to 3.4%.

Despite the minor fiscal slippage and the likely boost to demand-pull inflation, RBI’s stance in the policy meeting on Feb 07, 2019, is likely to remain soft. It shall be guided more by global events. The recent U-turn by US Fed, in its monetary policy stance, should help RBI maintain an accommodating monetary policy stance in near future.

So, considering the electoral constraints, the budget can be seen as a fiscally responsible budget, and is not likely to damage the continuance of policy reforms kick-started by the government. This should give a boost to the sentiments of investors.

Fixed Income mutual fund investors should remain invested in short duration accrual debt funds and domestic consumption oriented businesses portfolios should be the focus of the equity investors.