Budget 2013 : Where to Invest

Union Budget 2013 is out and finance minister Mr. P. Chidambaram has several different proposals for investors to invest in the specific areas. Here are some of the areas where the amount can be invested

1. Tax Free Infrastructure Bonds

The Finance Minister has given permissions to several institutions to issue tax free infrastructure bonds for one more year. As many as four infrastructure debt funds have been registered. So, for investors who want to earn tax free income, this is a place where they can put some of their funds. But the thing that is to be kept in mind is the nature of these infrastructure bonds. These are long term investments and are typically for a period of 10 and 15 years

2. Equity Mutual Funds

The Security Transaction Tax (STT) that was levied on equity oriented mutual funds has been brought down significantly. This is valid for the transactions done through stock exchange as well as directly with the mutual fund. This reduces some of the additional expenses that an investor used to incur earlier and hence it becomes a suitable low cost investment for an investor to park some of his/her funds. The finance minister has reduced the STT on mutual fund sale and purchase at the counters from 0.25% to 0.001%. For mutual funds sold on the exchange, the STT will be 0.001% compared to 0.1% earlier, for the seller side only

3.       Inflation Linked Bonds

With the rising inflation, investors would like to ensure that their fixed income investments are protected against the rise in inflation. In the Union Budget 2013, the finance minister announced the introduction of inflation linked bonds in the Indian market. This will enable protection for investors against the inflation so some part of their funds can be allocated to these investments. These kinds of investments are known to have a “real rate of return”. Removing the effects of inflation from the return of an investment allows the investor to see the true earning potential of the security, without external economic forces. For example, say an investor held a bond that returned 4% over one year. Examining only the return shows that this bond earned a positive income. However, if inflation for the year was 5%, the real rate of return on the bond becomes -1%. This is an approximate measure. The exact measure is given by the following formula:-

Real Rate of return = (1+ rate of return) / (1+ inflation rate) – 1

In India, the Inflation linked bonds are linked to the Whole Sale Price Index (WPI). Here, WPI is the average inflation of common commodities pertaining to household, power and manufactured items, giving a fair figure of inflation level in the market.

Let’s say that you buy a regular bond for Rs. 100 with a coupon rate of 3%. Consider that the inflation rate is 5% when the bond matures. Therefore, the actual value of the bond is Rs. 105 but the coupon payment is Rs. 103. Thus, in actual terms we are at a loss of Rs. 2. With Inflation-Indexed Bonds such problems are taken care of. This is because the bond is indexed to the inflation rate. This means that for the same situation as above, the bond is indexed to the inflation rate of 5%. Therefore, the face value of the bond increases to Rs. 105 instead of Rs. 100. The coupon rate of 3% is now calculated on this Rs. 105. Therefore, the payment comes to Rs. 108.15. In this manner the buyer of bond does not incur any loss. Same is the case during a depression when the rate is low, except that the process is reversed. The face value is reduced below Rs. 100. In this way the issuer does not face any loss.

For stronger inflation indexed bonds, indexation is applied on interest also.  In the above scenario the 5% inflation is applied on the coupon rate, increasing it to 3.15% from 3%, giving you a net return of Rs.108.30.


4. Rajiv Gandhi Equity Savings Scheme

In Union Budget 2012, the finance minister announced the introduction of Rajiv Gandhi Equity Savings Scheme (RGESS). This scheme was meant for the new investors who either do not own a Demat account or for the investors who have opened a Demat account but haven’t made any transaction till the announcement of scheme. The deduction under this Scheme shall be available to individual investor whose Gross total income for the financial year is less than or equal to Rs. 10, 00, 000. Maximum investment amount under this scheme is 50,000 and the deduction allowed is 50 % of the investment amount.

In Union Budget 2013, the finance minister announced an extension to this scheme. Individuals with Gross total income up to Rs. 12, 00, 000 can avail the benefits of this scheme. Scheme is now available for three successive years so that an individual can invest Rs. 50, 000 each in these three years in the specifies securities and funds