How to Minimise the Effects of Volatility

Published July 22nd, 2019 - 08:00 GMT
Exposure to debt instruments may be increased when equity markets nosedive due to global turmoil.
Exposure to debt instruments may be increased when equity markets nosedive due to global turmoil. (Shutterstock)
Your financial goals should guide you through uncertain times.

Question: I have been trading in shares on Indian and global markets. I am told that the volatility in market conditions is unavoidable due to geopolitical turbulence. Is there any way for investors to safeguard themselves in this scenario?

Answer: The most important point to be noted is that no decision should be taken hastily based on market rumours. Your financial goals should guide you through uncertain times. While you cannot control external influences on the stock market, you should check the quality of the information which you have before you take any decision to disinvest. One of the important guidelines to be followed is that you should diversify your investments into various asset classes in order to offset risks which may occur in one class. This will ensure that any loss which you suffer would get adjusted against the gains which you will make from a safer investment.

While investment in gold is considered to be a traditional hedge against inflation, a balance should be maintained in your portfolio and generally a 5 to 10 per cent investment in gold products would be a good bet. Exposure to debt instruments may be increased when equity markets nosedive due to global turmoil. The reason is that protection of your capital should be the foremost consideration while making an investment decision. Most analysts advise that investment in mutual funds linked to a systematic investment plan would give reasonable and safe returns over a 5- to 7-year time frame.

Q: The Goods and Services Tax (GST) has been in force for more than one year. Some of my exporter friends in India are complaining that there is strict monitoring of tax collection and that punitive action is taken against some of them. Is this not affecting exports from India as exporters are put to scrutiny and punished?

A: Only those exporters are under scrutiny where it is found that they have made fraudulent claims of input tax credit. There are about 2,000 entities, which account for 80 per cent of the exports from India. The Central Board of Indirect Taxes and Customs has issued a circular highlighting the fact that there is a substantial variation between the freight-on-board value declared in the shipping bill and the taxable value declared in the GST return. This is being done to claim higher credit with a view to pay lower tax.

A new risk management system is being put in place under which the income disclosed in the tax returns will be matched with the value of consignments shipped out of the country. This will ensure that it does not affect genuine exporters. It will also ensure that exporters do not inflate the value of their consignments in order to claim higher benefits under export promotion schemes, such as Merchandise Exports from India Scheme. Therefore, only those exporters are facing punitive action if they have availed of input tax credit on the basis of ineligible documents or fraudulently utilised that credit for payment of IGST on goods exported from India.

Q: The Indian Government has promised to root out corruption. However, the tax payers are feeling the heat as lot of arbitrary assessments have been made and refunds are not being granted on flimsy grounds. Are any steps being taken to reduce this harassment?

A: The Finance Ministry is taking urgent steps to clean up the tax administration in respect of direct taxes, excise and customs. In several cases, officers of the rank of Commissioners, Additional Commissioners and Assistant Commissioners have been suspended and their services terminated by invoking Rule 56-J of the Fundamental Rules. Under this provision, officers can be compulsorily retired if certain charges of non-performance or corruption are established.

Therefore, clear signals are now being given to government officers that their performance is being monitored and that their services will be prematurely terminated in case they act in a manner which is contrary to public interest or are guilty of any misdemeanors. Those whose services are terminated prematurely are given pay and allowances for only three months after such termination and they are not entitled to pension benefits.

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