“How will the GST impact your personal financial plan” surely appears to be a rather strange question? In reality, the implications of the GST for your financial plan could be much more significant that you may care to imagine at this point of time. GST is going to directly and indirectly impact your asset mix, your investment approach and your insurance selection. Remember, your financial plan is your passport to achieving your financial goals; both medium term and long term. Therefore, understanding the implications of the GST on your financial plan is critical to understanding the larger ramifications. More importantly, you need to sit down with your financial advisor and post the following 4 key questions about your financial plan…
How will inflation impact my financial plan?
An important factor to be considered in any financial plan is how rapidly the costs will rise. The GST rates will mean that most of your basic food items are likely to get cheaper while education costs are unlikely to change as they will continue to remain outside the GST purview. What is relevant for you is what is going to the long term sustainable rate of inflation that you need to use for projecting your future lifestyle expenses. Based on the experience of other countries, the inflation is likely to become more benign after staying elevated for a short period of time. That will mean that you need to have a granular approach to inflation by projecting higher costs in the next two years and a more benign increase after that instead of following a flat inflation approach. This could make a substantial difference to your long term funds requirement and therefore your investment strategy.
Is there a stronger case for more equities in your portfolio?
This is a question that is best answered via your discussions with your investment advisor. But here are some key pointers. Firstly, the higher transaction cost structure in the form of higher GST rates will mean that transaction in equity and debt will become costlier. This will be eventually passed on to you either in the form of brokerage costs or as MF Expense ratios. The focus must be on long term wealth creation rather than trying to trade the market over the short term as the costs of the same can be quite prohibitive. Secondly, the GST is likely to be accretive to the overall GDP by 1-2%. While the benefits cannot be precisely quantified at this point of time, it is certain that GDP will get a boost. The best way is to play this through the equities route. Lastly, there is the big distribution restructuring story in the post-GST scenario. With FMCG, automobiles and logistics stocks likely to get re-rated, equities will be the best way to play these stories. In terms of asset mix, equity could become more important in your financial plan than other asset classes.
How much of real estate and gold to be held in your plan?
The GST is likely to position financial assets at an advantage over real assets like property and gold. With the GST and the RERA Bill passed, real estate is likely to see more of official money flows and less of cash flows. That means properties are going to be less in demand as an investment avenue, although they will be still in demand for a primary residence. If you are planning to hold on to property from the point of appreciation over a longer period, you need to do a rethink. With demonetization and GST, real estate transactions are going to come increasingly under the lens of the tax authorities. For capital appreciation, you need to rely more on financial assets like equity and mutual funds rather than on real estate. Under GST, Gold will become more expensive and also most small gold traders are likely to come under the GST ambit. So, the add-on benefits that you could get from your neighbourhood jeweller may not be available any longer. GST on gold will also be marginally higher entailing a higher cost. You need to factor these while deciding on your gold allocation in your financial plan. Keep gold at the lower end of your proposed range.
Get more value for money from your expense budgets…
One of the underlying themes of the GST is to be lenient towards items of mass consumption and to be a little severe on items that are seen as exclusive. Most high-end products will attract a penal rate of tax that will be higher than the median rate. Your household budget needs to be tweaked accordingly. Ask yourself the value for money question before undertaking any expenditure. For example, be it clothing, footwear or entertainment, the rates of GST vary sharply across mid-end products and high-end products. When you tweak your annual budget, you save money which can accumulate into a tidy sum over a longer period of time. Use the GST as an opportunity to realign your budget to make it more value-centric.
The moral of the story is that GST is likely to be a big boost for equities vis-à-vis other asset financial asset classes. The onus will be on you to sit with your financial planner and ask these questions. Above all, don’t forget to understand the implications of GST on your household budget and how you can generate more value for money!