Mutual Funds

A balanced Budget

| Updated on February 04, 2018 Published on February 04, 2018

Keeping the focus on rural development and the elderly

Budget 2018 has adroitly balanced managing the growth needs of the economy as well as keeping the fiscal position under control. It has projected a marginal fiscal slippage of 3.5 per cent against a previous target of 3.2 per cent. Given the circumstances, this slippage is acceptable.

For the coming year, the Government has pegged the fiscal deficit at 3.3 per cent, which is 20 basis points lower. This is a minor fiscal push for the economy and at the same time it shows that the Government is committed to maintaining fiscal discipline.

Focus on common man

On the whole, the Budget is a well-rounded and holistic one that has kept the common man under focus. The interest exemption on fixed deposits has been raised to ₹50,000 for senior citizens from ₹10,000. The Government has also increased tax breaks on medical and health insurance for senior citizens.

The Budget has also rightly focused on rural development. The increase in minimum support price for crops will benefit farmers. This is a welcome step and it will give a little push to the rural economy.

The Budget has also taken the right step in proposing a lower tax rate of 25 per cent for companies upto a turnover of ₹250 crore. This will go a long way in reducing the stress in the small scale sector, which is one of the biggest employment generators in the country.

No tax advantage

On the equities front, the Government has introduced a long-term capital gains (LTCG) tax of 10 per cent on capital gains of over ₹1 lakh. Equities had a tax advantage for a long time. Hence, the Budget seems to have rationalised the tax structures, bringing some parity between other asset classes and equities. This tax has been introduced in a calibrated manner and has been non-disruptive.

While an earnings revival is expected in FY19, stock prices have run ahead and have captured the expected revival in earnings. Hence, equity prices appear to be on the higher side. Mid- and small caps have run up significantly over the last two years.

Therefore, it is a prudent strategy to invest in hybrid schemes, particularly balanced advantage schemes over a pure equity investment. While on the equities side, we prefer large-caps to mid- and small-caps given the current market conditions.

Post Budget, Debt has clearly emerged as an attractive asset class, especially credit opportunities funds. The Government encouraged the corporate bond market in this Budget and mentioned that ‘A’ rated corporate bonds should be considered for investments. As a result, this will expand the bond market and provide more opportunities for investors. The scope of investment will widen and it will give fund managers the additional leeway to look at good investment grade corporate bonds that provide better yields.

Hence, we think that the current bond market is extremely attractive for investors to make SIP investments in credit funds.

Yields have also started to firm up. With the expansion of opportunities down the yield curve, the fixed income side has become relatively attractive. It’s a good time to starting making SIP investments in credit opportunities/accrual funds. This Budget has also raised infrastructure spends, which can boost the infra sector. Currently, the infrastructure sector is relatively undervalued and presents a good opportunity. Likewise, the power utilities sector also is undervalued. We are also comfortable with valuations in IT and pharmaceutical sectors. From a valuation perspective, power utilities and infrastructure sector are relatively underpriced and we believe that these are the two sectors that can deliver a better investor experience over the coming years.

The author is MD & CEO, ICICI Prudential AMC

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