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11 smart money moves investors can make to improve finances, make more money in 2021

The year 2021 was tumultuous due to the spread of covid. But the devastation wreaked by the pandemic had very little repercussions on the financial markets. The large-c – indices have risen about 20% during the year, while mid and small-c – stocks rose even more. Mutual fund investors, who had seen their funds lag behind benchmark indices in 2020, were pleasantly surprised to see their investments churning out good returns in 2021. Most equity fund categories have beaten their benchmarks during the year.

Market Report Card for 2021

Best performers in 2021
Best performance in 2021

Worst performers in 2021
Worst performers in 2021

Figures are % change till 24 Dec Source: Value Research

It was also the year of the IPOs when 62 companies raised a record Rs 1.2 lakh crore. This included the Rs 18,300 crore Paytm issue, the biggest ever IPO in the history of Indian c -ital markets. Many IPOs listed at handsome premiums, but Paytm is trading 30% below its IPO price. While equity investors were partying during 2021, debt investors had nothing to smile about during the year. Except for the credit risk category, all other debt fund categories delivered insipid returns.

As we enter 2022, equity markets are looking precarious and debt markets are expecting rate hikes. We reached out to experts to know what investors should do in such a scenario. This week’s cover story looks at 11 steps that investors should take now to improve their finances in the New Year.

We hope you find it useful. Wishing you good health, prosperity and safety in 2022.

1. Reduce allocation to equities

With markets looking overvalued, experts are advising a tactical cut in equity allocation.

The stock market is yet to hit its intermediate bottom, but analysts expect a bigger correction in 2022. Rising inflation has led to rate hikes by global central bankers. “The rally in the last 18-20 months was largely due to monetary easing. It is being withdrawn now,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

The emergence of Omicron is also worrying markets. Global markets had rallied after countries started vaccine programmes, hoping that the vaccines would control the pandemic. But it seems we will have to live with the coronavirus for some more time. This will hurt sectors such as hospitality, aviation and entertainment.

Some market participants hope that Omicron will force central bankers to postpone rate hikes, but the possibility seems remote. “Inflation is no more transitory and may go well into 2022, so central bankers may continue with rate hikes. The RBI is expected to increase reverse repo rate in February 2022,” says Unmesh Kulkarni, Managing Director and Senior Advisor, Julius Baer India.

Meanwhile, foreign portfolio investors (FPIs) have withdrawn more than Rs 36,000 crore from equities in the past three months. While some of this has moved to other asset classes, a good chunk has shifted from India to other emerging markets. The Indian equity markets are trading at a premium valuation compared to developed markets and other emerging markets (see chart), so FPIs are booking profits.

Technical factors are also indicating continued weakness. The Nifty is now trading below its 30 September closing value of 17,618. If it doesn’t recover and cross this level before 31 December, it will be the first negative quarter after March 2020. “Negative quarterly returns, if it h -pens, indicates that the correction will be for the entire rally that started in March 2020,” says Jay Thakkar, VP and Head of Research, Marwadi Shares & Finance.

The ongoing correction may continue for 1-2 more quarters, so investors can consider reducing their equity allocation now. For some investors, the relentless rally might have skewed their asset allocation towards equity. They should book profits in equities to restore the original allocation mix. Others might have taken aggressive bets and gone overweight when stocks crashed in early 2020. “If you had earlier taken an overweight call on equity, bring it down to your strategic asset allocation levels now,” says Kulkarni. Since the relative valuation is still high, investors can also go underweight on equity. “A tactical allocation out of equities is needed. We suggest 15% less compared to the strategic equity allocation,” says Kunj Bansal, CIO, Karvy PMS. If the equity allocation was 75%, bring it down to 60%. If it was 50%, bring it down to 35%.

The valuation premium is high
Foreign portfolio investors are booking profits and moving to other less costly emerging markets

Valuation premium is high

2. Go for export-oriented sectors

These will benefit from the US dollar strengthening against the rupee.

The market is expecting a rate hike by the US Fed, which has led to the strengthening of the dollar against the rupee. The US dollar has rallied 3% in the past three months and is now close to its all-time high level of Rs 76.87 that it achieved on 16  -ril 2020. Just like the equity markets, the forex market is also expected to be very volatile in 2022 because of the various signals coming from several central bankers. The recent rate hike by the Bank of England was against the market expectations and had put negative pressure on the rupee. “Due to worries about quicker rate hikes by global central bankers, there could be some more depreciation in the next 1-2 quarters and the US dollar may go up to Rs 77 in the short term. However, the situation should improve in the second half of 2022,” says Arun Singh, Chief Economist, Dun & Bradstreet India.

Rupee weakened against $ in 2021

Exporters will benefit from this

Rupee Depreciated

What could help the rupee? India may get added to the global bond index which could lead to dollar inflows. “After the initial weakness, the rupee is expected to end 2022 around the current level and the increased inflow due to bond index inclusion. If the bond index inclusion doesn’t h -pen, the dollar will end the year above Rs 77,” says Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank.

IT sector rose more than the market in 2021

Since IT stocks have already run up quite a bit, buy them on declines

IT Sector Rose

A weaker rupee will help exporters. Exporters are already seeing the benefit of the rupee depreciation. But that is just one of the factors helping exporters now. “In addition to the depreciation in rupee, exporters are also benefiting from factors like the PLI scheme, China plus one policy adopted by global companies, etc. If you want to remain invested in equity, exporters are one of the good places to hide,” says Jasani.

Within the exporting sectors, most experts prefer the IT sector. “The IT sector is expected to outperform because of the increased demand,” says Bansal of Karvy PMS. The sector has already rallied significantly in the past one year (see chart). “Exporters are likely to benefit from the rupee depreciation. Though the IT sector is not che -, its outlook is constructive. Since it is relatively better positioned compared to other sectors, consider buying IT companies during corrections,” says Kulkarni.

Investors should be more careful with other exporting sectors. Pharma stocks may be volatile due to US FDA  -provals. Similarly, rising shipping costs have cut the margins for traditional export sectors such as textiles and chemicals.

3. Shift to short-term and floater funds

A hike in interest rates seems imminent, which will not bode well for medium and long-term funds.

After many years of softening bond yields, 2021 saw yields climb up on fears of rising inflation and higher government borrowing. Even as the bond markets were spooked, the central bank itself held firm on interest rates and maintained accommodative stance.

Going into the new year, however, the persistent price pressures and improved growth outlook could force the RBI to rethink. Analysts expect the normalisation of liquidity and hike in interest rates sooner rather than later.

While bond markets have seemingly pencilled in a couple of rate hikes, the possible divergence in the timing, the extent and the pace of these actions will keep markets volatile. “We expect considerable divergence in the actions of the central banks and the expectations in the bond market thus resulting in increased volatility in the coming 6-9 months,” says Arvind Chari, CIO, Quantum Advisors.

Govt bond yields moved up during 2021
Gov Bond Yield

In this backdrop, investors are advised to remain anchored towards accrual strategies. Traditional accrual funds—those generating returns primarily from interest earnings—are considered a reasonable safeguard against interest rate volatility. “The best way to play the rate hike cycle is to focus on the short maturity segments of the market. Low market risk, cash equivalent returns seems to be best bet from a risk-return perspective,” opines Chari.

Debt funds gave insipid returns in 2021
Debt fund return

Ultra short-term bond funds and liquid funds are least vulnerable to c -ital depreciation even if interest rates rise. Also, since these park money in securities with very short maturity of up to 3-6 months, the portfolio gets refreshed quickly, allowing the fund to c -ture rising yields in the near term. Experts advise against incremental investments in duration strategies. “Cut down duration of your existing portfolio and reduce allocation to roll-down strategies to gear the portfolio for 2022,” advises Prashant Joshi, Cofounder and Partner, Fintrust Advisors LLP.

Experts also favour floater funds, which invest in floating rate bonds that reset coupons at regular intervals. The interest rate is pegged to a reference benchmark rate, with a spread added to the benchmark rate to arrive at the actual coupon rate. With every change in the benchmark rate, the rate offered on the floating rate bond also changes. Since the payout is reset according to prevailing rates, the fund can potentially gain from rising rates.

R. Sivakumar, Head – Fixed Income, Axis Mutual Fund, says floater funds can be expected to do better than traditional bond funds, for two reasons. “Floating rate bonds typically enjoy a spread over traditional bonds of comparable duration, fetching higher yields. And while traditional short duration funds rely on reinvestment to c -ture rising yields, floater funds are configured to automatically gain,” he says.

4. Utilise Rs 2.5 lakh tax-free limit in VPF

A hike in interest rates seems imminent, which will not bode well for medium and long-term funds.

Budget 2021 introduced a new tax on the interest earned by Provident Fund contributions above Rs 2.5 lakh in a year. Not many were affected because very few people breach the Rs 2.5 lakh annual threshold. The Voluntary Provident Fund (VPF) option, wherein a subscriber can put in more than the mandatory 12% of the basic pay, is not used very widely. However, experts say one should seriously consider investing in the VPF in 2022.

Given the decline in interest rates, subscribers to the scheme should contribute at least Rs 2.5 lakh to the Provident Fund. This will earn tax free returns of 8.5%. Higher contributions can also be considered because despite the new tax, the VPF still works out to be the best investment option in the fixed income space. “Other fixed income options such as bank deposits and bonds are offering barely 6-6.5%. Their post-tax returns are not comparable with what VPF will give,” says Archit Gupta, CEO of tax filing portal Cleartax.com.

Provident Fund is still a good option

Despite the new tax, VPF gives higher returns than other options

Provident Fund

*Contributions beyond Rs 2.5 lakh a year; Figures are percentage returns

Others believe that individuals should consider other saving options such as the NPS. “Investors should reduce the self contribution to the Provident Fund to Rs 2.5 lakh and invest the rest in NPS where they can get additional tax deduction and earn higher returns,” says Sudhir Kaushik, Co-founder of Taxspanner.com. The tax benefits offered by the NPS can boost the returns for investors. “Instead of investing Rs 50,000 in the VPF, if the same money is put in the NPS, an investor can lower his tax by Rs 10,000-15,000,” says Kaushik.

5. Buy term insurance cover soon

Premiums set to rise 15-40% in the second half of 2022. Pick one before they surge.

Buying a term plan has always been a good idea, but Covid has underlined the need to buy one like never before. While it would be smart move to buy a term plan in the coming year, it would be smarter to hasten the process for another very crucial reason: the premiums of term plans are set to rise 15-40% in 2022.

Currently a 30-year-old can buy a Rs 1 crore online term plan till the age of 60 years for as little as Rs 900 a month, or Rs 10,800 a year. But after the premium hike in 2022, he will have to pay anywhere from Rs 12,420 to Rs 15,120 a year. The premium hike will affect both online and offline insurance policies.

“Covid has been one of the major reasons for the hike in premium rates. The mortality rates and claim settlement ratios increased manifold after the pandemic,” says Aatur Thakkar, Co-founder and Director at Elephant.in, Alliance Insurance Brokers.

Adds Tarun Chugh, MD & CEO, Bajaj Allianz Life: “During this period, reinsurers (companies that provide financial protection to insurers) have also been impacted, and as a part of their evaluation processes, have increased the prices of term plans. This, in turn, will bring about a rise in premiums.”

As talks with reinsurers are in the final stages, the percentages will soon be decided. “The new premiums will come into force from the fourth quarter of 2022-23,” says Thakkar.

While you should buy a term plan if you haven’t already, don’t consider the higher rates a deterrent. “Despite this increase in rates, term plans in India cost much lower as compared to those in other countries like Sing -ore or Germany. A term plan is one of the most cost-effective and value-packed options to manage risks,” says Chugh.

Advisers suggest a cover equal to 15-20 times one’s annual income, but you should also consider your age, assets, liabilities, lifestyle and expenses of your dependents when you buy a plan.

6. Accumulate gold when prices decline

Experts say at least 10% of the portfolio should be in gold. But be ready for volatility in the short term.

The yellow metal is set to record its first annual loss in three years. Large scale vaccination drives and resumption of economic activity across the globe spurred investment in riskier assets and put a dampener on gold. Heavy buying in stocks was accompanied by liquidation of gold ETF holdings. The US Federal Reserve’s indication of bringing forward rate hikes and t -ering bond purchases sent gold prices tumbling below $1,800 per ounce in the global market. Even as sticky inflation would normally see sentiment favouring gold as a hedge, the Fed’s hawkish stance has strengthened the US dollar and put a lid on gold prices.

At the same time, Omicron has induced fresh curbs and threatened to derail recovery across the globe. This may force central banks to delay monetary tightening, giving impetus to gold. Prashant Joshi, Cofounder, Fintrust Advisors LLP, argues, “If the new Covid-19 variant shows its head, bringing uncertainty and extending the slowdown, gold will be the go-to investment option as it is an established safe haven in times of economic turmoil.”

After lagging behind silver for some time, gold has outperformed of late
Gold has outperformed

Due to the uncertainty, gold prices are likely to consolidate in the near term, making it conducive for investors to accumulate the yellow metal. Chirag Mehta, Senior Fund Manager – Alternative Investments, Quantum AMC, observes, “Gold as a result of conflicting forces is expected to stay range bound over the next few months. But long-term gold investors will have the last laugh as a hasty t -er could hurt growth and trigger market tantrums making investors seek portfolio diversifiers like gold.” He further adds that gold price should also ideally catch up with the pandemic era’s elevated global money supply and low real rates, as it has done historically. Given the current scenario and transitory state of many factors, it is prudent to allocate up to 10% in gold, reckons Joshi. If the allocation is lower, it is advisable to build it in a staggered manner, he insists.

Meanwhile, silver prices have moved in an erratic fashion. Between mid-March 2020 and mid-July 2021, silver shot up 81% even as gold priced jumped 20%. On the back of this sharp outperformance, the gold-silver ratio had narrowed significantly from a three-decade high last year. This ratio denotes the price of gold as a multiple of the price of silver. A lower gold-silver ratio typically implies the yellow metal is likely to outperform in the near term whereas higher ratio indicates that silver may perform better going ahead. Since then, gold prices have held firm even as silver has lost 12%.

Meanwhile, Sebi has given the nod to silver ETFs, opening up another investment avenue for investors along the lines of gold ETFs. Several fund houses have already filed p -ers for silver ETFs. But experts caution that investors should not expect silver ETFs to offer diversification benefits similar to gold. “Silver prices, because of the metal’s industrial use, have a stronger relationship to economic growth. Silver prices generally tend to move in tandem with equities. In contrast, gold gets a push in times of economic distress when equities tend to suffer. Gold is thus a better diversification tool,” explains Mehta. Most experts maintain that gold alone is sufficient as a diversification vehicle for anyone’s portfolio beyond equities and fixed income. Discerning investors may opt to take exposure to silver from time to time on a tactical basis.

7. Don’t delay buying a house

Property prices could move up due to rise in demand and jump in construction costs.

After remaining stagnant for several years (see table), property prices are expected to move up now due to increased buying interest and low home loan rates. “The Indian residential real estate market seems to have embarked on a long-term upcycle, and 2022 is very likely to fare better than 2021. Home prices may  -preciate by 5 – 10%,” says Anuj Puri, Chairman, Anarock Group.

Real estate prices remained almost flat during the past five years

They are expected to move up now due to increased demand and jump in construction costs

Flat property prices

While prices have remained stagnant, increase in income levels has improved affordability in cities across India. End users are back in the market. Unsold units, a major headwind for the housing sector, reduced by 1% q-o-q and 4% y-o-y during the July-September period. This is significant because it h -pened despite an increase in new launches. While supply during July-September grew by 1.8 times yo-y, sales grew by 2.6 times. The dip in the inventory of ready to move in segment was even sharper—from 24 months inventory to 17 months.

A sharp rise in construction costs is another reason why real estate prices are poised to go up now. While builders will be able to keep prices of fully constructed properties stable and reduce existing inventories, it will be difficult for them to do so for new or under construction projects due to the jump in construction costs.

In addition to the increase in prices of construction materials, there is jump in labour costs also due to covid induced disturbances. However, though real estate prices will move up, don’t expect them to zoom. “Developers are cognizant of the fact that any unwarranted price hike will deter the demand cycle and therefore, hike prices now in a disciplined manner and only to compensate for increasing input costs,” says Puri.

8. Check your AIS to verify tax

It has details of all financial transactions conducted by you during the year

How much interest did you earn on fixed deposits and your sayings bank account during this year? How much was the dividend on your stocks and mutual funds? Did you make any c -ital gains when you sold stocks or switched funds? Till now, many taxpayers used to sweep such questions under the carpet when they filed their tax returns. But things have changed with the introduction of the Annual Information Statement (AIS).

The AIS has details of all your financial transactions carried out during a financial year. Unlike the Form 26AS, which only has details of transactions where TDS or TCS was deducted, the AIS also has information on salary and business income, interest earned, dividends received, investments done and even expenses incurred. “If the Form 26AS was a simple X-ray of your finances, the AIS is the financial equivalent of an MRI scan,” jokes Sudhir Kaushik, Co-founder of tax filing portal Taxspanner.com. “It is a comprehensive statement of financial transactions that are reported to the tax department,” he says.

Tax experts say that taxpayers should match the information in their AIS with the income declared in their tax return. “If there is a mismatch in the information, the taxpayer is likely to get a tax notice,” says Kaushik. The AIS can be seen by logging on to the new income tax website. It can be downloaded in PDF format. If the user is not already registered on the e-fi ling portal, one needs to first register before being able to access the AIS.

9. Harvest long-term c -ital gains in equities

Up to Rs 1 lakh LTCG from stocks and equity funds are tax free in a financial year. Don’t let this exemption l -se.

If you have been thinking of booking profits in stocks, keep an eye on the calendar when you do it. Under section 112A, long-term c -ital gain of Rs 1 lakh from equity and equity mutual fund are tax free in a financial year. This is why tax experts advise investors to harvest their gains on an annual basis. “Instead of accumulating long-term c -ital gain for several years and booking profits at one go, you can reduce tax liability by booking them every year,” says Gautam Nayak, Tax Partner, CNK & Associates LLP. This way, an investor can reduce his total tax liability significantly (see table).

Instead of accumulating gains, book profits every year and pay less tax
Booking C -ital Gains
Accumulating C -ital Gain

Please note that booking profits does not necessarily mean reducing allocation to equities. While reducing the allocation would require selling equities and shifting the money to debt, the harvesting of gains only involves selling off some stocks and funds and redirecting the sale proceeds to other equities. The asset allocation of the portfolio remains largely the same.

The simplest way to do this is to sell one stock or mutual fund scheme and buy another similar one. For example, you can sell HDFC Nifty Index Fund and simultaneously buy the UTI Nifty Index Fund or vice versa. Or you can sell TCS and buy Infosys or vice versa. If you want to do this with the same stock, you must wait for the shares to go out of your demat account before buying them back. In case of mutual funds, wait for the sale transaction to be complete before buying the mutual fund scheme again.

10. Opt for wellness benefits

Smart devices,  -ps help you stay healthy and cut your premium.

Perh -s the most prudent decision in 2022 would be to stay healthy and buy sufficient medical insurance. You can achieve both these by buying plans that combine health and wellness benefits. Using smart devices (smart watches, wrist bands, wearable devices) and  -ps, the wellness programs linked to insurance plans assess health risks and help people become healthier through physical activity. In fact, most insurers now have underwriting-based loading linked to lifestyle diseases like diabetes and high blood pressure. So, effectively, a healthy customer will not pay the premium loading, even as the insurer reduces its payout for lower number of claims.

The best bit? You earn rewards, discounts and incentives, ranging from discounted premium, subsidised purchases from brands, to OPD and preventive healthcare expenses, among others.

“Many health insurance policies offer wellness benefits, which are not limited to regular health check-ups and online doctor consultations, but reward customers with discounts of up to 30% in policy renewal premium for maintaining a healthy lifestyle,” says Krishnan Ramachandran, MD & CEO, Niva Bupa Health Insurance. For instance, under their Live Healthy Benefit program in the ReAssure plan, you can get a renewal premium discount of up to 30% depending on the average number of steps you take in a day.

ManipalCigna’s ProActiv  -p, under its ProActiv Living program, can help you earn points for walking, running, jogging, cycling, swimming or weight training, and the Healthy Reward points thus earned can translate into lower premium and other health maintenance benefits. “Through the complimentary wellness program, customers can track their physical activity on the  -p by integrating select wearable devices and making every step count,” says Prasun Sikdar MD & CEO ManipalCigna Health Insurance.

Similarly, ICICI Lombard’s DoTheDifficult wellness program rewards healthy behaviour by helping one earn wellness points through activities which can be redeemed for OPD benefits. The activities include participation in marathons, cyclothons, swimathons and professional sporting events, gym, yoga or aerobics membership, and quitting tobacco abuse.

Aditya Birla Health Insurance’s AB Multiply wellness program also offers benefits and rewards like access to gyms and fitness centres, cash back on wearable devices, savings on everyday expenses, and rewards on getting healthier. Through their Activ Health  -p, you can take 10,000 steps, burn 300 calories or go to a gym for 30 minutes daily, and earn HealthReturns, which can be redeemed against premium during next renewal.

11. Upskill to stay relevant

Ad -t to the new environment by upgrading continuously.

Covid has not only altered where and how we work, but the work itself has changed as jobs and skillsets became redundant overnight. More than 22.7 million jobs were lost in  -ril-May alone this year, as per CMIE. Now with Omicron on the rise, experts believe that upskilling and ad -ting are the smartest way to safeguard your career in 2022. With reliance on technology increasing, IT continues to be the top sector attracting jobs. Some of these are in data science, cloud computing, artificial intelligence, DevOps, blockchain developer, robotic process automation and cybersecurity, according to Naukri.com.

“With digital becoming the norm and upskilling emerging as the key word in corporate landsc -e, people are looking at new, innovative ways to advance their careers. The year 2022 will bring new opportunities and specialised ventures, which will require a proactive  -proach to seek future-ready skills,” says Ritu Agast, Director, HR, Pearson India.

Agrees Neeti Sharma, President & Co-Founder, TeamLease EdTech: “As most businesses rebuild growth strategies, shifting the skillset requirement in employees, the one thing that all job seekers need to focus is on learning continuously, upskilling and staying relevant.”

In fact, in 2021, investment by companies in upskilling saw an 18-25% increase and these are further set to grow by 12-15% in 2022. Some sectors where investments have gone up are IT, e-commerce, logistics, MFSI, pharma, ed-tech and industrial engineering. “Companies are not only upskilling for technical and domain-specific skillsets, but also for soft, communication and behavioural skills,” says Sharma.

How to upskill and learn new competencies

Attend In-House Courses & Workshops:: Check if your company is holding workshops, webinars or courses for upskilling employees in the fields of your interest. Attend these, even if you have to pay for it.

Join Online Courses: There are plenty of online courses, both free and paid, offered by Udemy, Coursera, EdX, Code Academy, Alison, Google Digital Garage, among others. Many of these are affiliated to top global universities and can help advance your career.

Attend Offline Courses: If you are working from home, you will have time to attend courses that require physical presence or practice skills. Do so in a way that it doesn’t impact your current job. REQUEST JOB ROTATION: If your company allows it, opt for job rotation in different verticals of your interest so that you can multi skill yourself. If you can wear several hats, you will never be the fi rst person to be axed.

Read Up: Look for professional or technical books on the topics of your interest and go through these to upgrade your knowledge and skills. Books can also help you acquire critical soft skills, such as team work and communication.

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