How Budget will impact your financial plan?

So, you have begun your journey towards your long term goals with a well crafted financial plan. But financial plans are, by default, dynamic. That means you need to tweak your financial plan according to the situation and the budget is an important trigger. Does the Union Budget really trigger the need to tweak your financial plan? Here are a few key pointers to consider:

Imports of many consumer goods could become costlier

Your financial plan is based on a basic estimate of your incomes and expenses. We do not realise but a lot of the products that we use in our daily lives are imported. The Union Budget has imposed a 10% Social Welfare Surcharge on all imports. Additionally, customs duties on a host of imported products from mobile phones to cars to perfumes and footwear have been hiked. This is going to impact the rack prices of these products and that means your household budget is going to overshoot on the upside. Be prepared for this situation.

Higher inflation expectations need to be built in

Your financial plan includes extrapolating your future costs by using the inflation factor. If you have used a conservative inflation factor then you need to think again. The higher rural spending combined with the higher fiscal deficit is likely to be inflationary. That means inflation could remain slightly higher in the next couple of years. If your inflation estimate was too conservative then it means that either you will be left with lower real wealth in real terms or you will need more outlays. Either ways you need to rework your financial plan with a higher inflation assumption.

If you are invested in debt, then look at the yield story

The higher fiscal deficit will mean that the government will end up borrowing more. In addition, large corporates now have to raise 25% of their debt requirements through the bond market. You could see overcrowding in the bond markets and the means you will have to be prepared for higher yields and lower bond prices. When yields rise, the bonds with longer maturities will lose more. If you are relying on long-dated bonds funds for stability and regular income then you need to do a rethink based on the new interest outlook. After all, the Economic Survey has also warned about higher interest rates in the light of higher GDP growth projections.

Be cautious when you book profits in equities and equity funds

Your financial plan will call for a substantial allocation to equity for long term wealth creation. But investors do have a tendency to book profits after a period of one year in case of liquidity needs. Now you need to be cautious as long term capital gains will attract tax of 10% on gains above Rs 1 lakh per annum. You need to either adopt a more long term approach or you need to spread your capital gains on two sides of the fiscal year end.

The moral of the story is that there is a greater inducement to hold on to your equity funds over the longer term. However, there is an opportunity for you to book profits without paying LTCG if you do it before March 31 2018. In case the profit is booked after March 31, 2018 then the cost of acquisition will be the price at which it was bought and not the price as on March 31 or January 31.

Choice between growth plans and dividend plans of mutual funds

Normally the tendency is to opt for growth plans of mutual funds if you are looking at long term equity funds and dividend plans in case of debt funds. If you are in a dividend plan, there will be an additional 10% dividend distribution tax (DDT) that your fund will deduct before paying dividends. This is almost akin to double taxation because the DDT is already deducted in when the company declared the dividends. This will surely impact your choice of growth plans versus dividend plans.

What about your plan if you are a senior citizen?

The Budget does make a case for senior citizens in favour of bank FDs. After all, now the tax exemption limit has been raised from Rs 10,000 to Rs 50,000. Also there will be no TDS so you avoid the hassles of refunds and Form 15G. Add to it, dividends on equity funds will also attract DDT. All in all, for senior citizens there is a strong case for shifting a bigger chunk of their money into bank FDs.

(The writer is Head of Research & ARQ at Angel Broking Pvt Ltd)