Though household expenses are up, borrowing will be cheaper

In the past couple of years, investors have been grappling with negative to negligible returns from stocks and mutual funds. However, things seem to have changed since the beginning of this month at domestic-cum-global levels. Over the last 15 days, the indices have jumped by close to 1,500 points thereby growing investor wealth by a good measure. Globally other countries too have initiated various stimulus measures to ease up the economy.

Monthly budgets expensive
Recent hikes in petrol prices and now diesel too will have a major impact on the monthly budgets. With inflation showing no signs of cooling-off, individuals would need to keep a close watch on their expenditure budgets. In addition to the fuel bills going up, these hikes would have a cascading effect on the prices of essential commodities like vegetables, milk, etc. The liberal quantitative easing programme announced by the United States has the potential to indirectly cause fluctuations in food commodity prices, especially in emerging markets like India.

In such a scenario, families will feel the strong need to keep a tab on their spending plan in order to maintain the balance between savings and expenditure. The best way to achieve this would be by maintaining monthly budgets and keep reviewing the same from time to time, say fortnightly, to understand the impact of these factors on one’s budget. Based on these results, the Emergency Fund needs to be reviewed and revised upwards adequately.
Borrowings cheaper
With the recent cut in CRR by RBI, there is a strong possibility of banks reducing their lending rates; implying lower EMIs for new borrowers and also for existing ones. Over the last couple of weeks, some banks have already taken the lead to reduce rates – both on loans as well as on deposits. Although the reduction in EMI will be welcome for borrowers, the same may get offset by the lower yield on bank deposits.

Borrowers with available lump sum money and looking to prepay loans should evaluate the potential effective rate of interest on the loans with a time horizon of next 12-15 months. Based on the results, they could rethink about prepaying if the effective borrowing rate is lower than the realisable investment yield.(MARKETS GET A BOOST, GOLD CORRECTS)

Equity investments
Already a lot of retail investors have developed a feeling of having ‘lost-out’ in the recent rally.

For more visit: Business Standard

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