What should you be doing with your MFs now?

The equity market has become more volatile since the announcement of long-term capital gain (LTCG) in budget 2018. The real culprit may not be the imposition of LTCG, but the global volatility which increased in the last fortnight and has contributed to heightened volatility in the Indian market.

Such volatility has caused much anxiety among investors and they are not sure what to do with their investments that will help them maximise their gains and minimise the tax burden.

We believe there is not much to worry about for atleast for retail investors. This is because of the ‘grandfathering’ clause attached to this announcement. According to which all your gains accrued till January 31, 2018 will remain tax-free. After that all the profits till the amount of Rs. 1 lakh will remain tax-free. That is for FY18, only the profit earned between February 1 and 31st March will be taxed.

Looking at the current market trend and volatility, we do not see the market moving up much from here on till March 31, 2018, hence your profits for FY18 are nearly tax-free. However, if you are having large corpus invested in mutual funds, of say more than Rs. 1 crore, then definitely, you might have to pay some tax even if your invested amount is up by 1 per cent.

From FY19 onwards you need to pay LTCG on all the gains exceeding Rs. 1 lakh, if you hold your investments beyond 12 months. For the shorter duration of holdings, you have to anyhow pay short-term capital gain tax at a rate of 15 per cent.

We believe there is a silver lining to this introduction to LTCG. First of all, it is not as bad as being perceived by investors, especially to retail investors. Our back of envelope calculation shows that you are liable to pay tax only if you invest atleast Rs. 60,000 every month and you earn on an average yearly return of 12 per cent. Although 12 per cent is realistic return, Rs. 60,000 is a very high amount for a retail investor.

Moreover, if you keep on booking profit on your investments after every one year (not exceeding Rs. 1 lakh) and rebalance your portfolio to align with your investment objective, we do not see LTCG a burden or dampener in your investment returns. Therefore, instead of waiting for a period where your investment objective or certain corpus for which you have been investing matures, you need to tactfully keep on booking profit regularly and rebalance your portfolio and achieve your financial goal.