Financial Cocktail Samosas: Bitesized money morsels for YOU, 01/07/2020

Financial Cocktail Samosas_ Bitesized money morsels for YOU, 01_07_2020

Is Inflation just a number or affects you too?

Diesel and petrol prices are increasing on a daily basis and this will result in inflation. Besides increase in logistics and transportation costs related to essential items, inflation also burns a hole in the common man’s pocket by bringing down real return from investments. Typically, most investors only look at the numbers (% of return) that investment products show and have a lack of understanding or ignore factoring in the impact of tax and inflation.

While income tax is charged on the return from different products differently, inflation basically reduces the value of money or purchasing power. Real returns can be far lower than what the product shows after considering tax and inflation, but it is the actual benefit that you get.

For instance: Bank FDs are currently offering around 5.1% interest per annum. If an individual falls under the highest tax bracket of 31.2% (including cess of 4%), post tax return is reduced to 3.50% per annum. Further, if we assume inflation of say 5% per annum, net return will translate into a negative figure of -1.50% (3.5% – 5%). In the long term, your savings and investments will shrink instead of growing. Ideally, it makes sense to invest in a product only when real returns from it are likely to be positive.

Where is the Stock Market going to?

The stock market crash of March 2020 had erased a lot of gains from investors’ portfolios, especially those having more exposure to direct equity or equity oriented mutual funds. But, then against popular perception and opinion, the reversal started to happen. After falling about 40% from January highs, the share market has gained back nearly 30% from its low!

Some of the factors behind recovery in the market include — steps taken by government and the RBI to infuse liquidity across sectors and support extended to small and medium enterprises, coupled with comeback of economic activities and relaxation in lockdown.

However, the near-term prospects don’t seem to be as rosy as it appears, as the number of Covid-19 cases are increasing by the day. Besides that, quarterly results of companies are due next month and probably most will reveal losses. We may see a downfall in the share market once again.

The Joys of Being Debt-Free

India’s richest person and chairman of Reliance Group of Industries, Mukesh Ambani, recently announced that Reliance has become a net debt-free company. In these difficult times, when most corporates are struggling to manage their cash flows, money is flowing in for Reliance, not only from the domestic market but even from large international investors. In a short span of two months, the company raised about Rs 1.7 lakh crore from investors and shareholders. One of the biggest investors includes Facebook, which bought around 10% stake in Jio worth Rs 43,500 crore.

According to experts, considering the investors’ profile, it seems that Reliance’s ‘zero-debt’ strategy involving leading technology companies is part of a long term plan that is underway—something based or related to technology and can help the company to expand in future and achieve further high.

Like in a company, the joy of being debt-free at individual level also calls for celebration!

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