The LTCG tax may have prompted a change in your investment strategy, but mutual funds still remain one of the best investment options aimed at wealth creation.
Mutual funds have had a great recent run. However, the market saw people selling volumes of mutual funds after the LTCG tax was announced by the government in the Budget 2018. The selling was fuelled to make the most of tax-free equity returns until March 31, 2018. The markets have now partially bounced back with the start of the new financial year, and a full recovery will still take time. That, however, should not discourage MF enthusiasts from continuing their investments.
MFs, despite the new LTCG tax, remain one of the best investment options aimed at wealth creation. What’s more is that ELSS fund investments qualify for tax exemption under Section 80C. You may surely want to restructure your portfolio, and we tell you the key factors to keep in mind while planning your MF strategy for 2018-19 as per your appetite.
Keep the SIPs Running
SIPs have always been the best way to invest in mutual funds as it does not require you to shell out large amounts at one go. Moreover, they make you accustomed to a routine that urges you to keep a fixed amount aside every month instead of spending it. But remember to allocate a realistic amount. Being overambitious can make you resort to credit for other expenses.
For beginners, it’s the right time to start an SIP, as it starts as low as just Rs 500 a month. You can start with a small amount and increase it later with increase in income and appetite for risk. For those already investing in the market, it’s a good time to remain invested and to meaningfully increase their investment contributions in tandem with an increase in income.
Avoid Long-Term Debt Funds
A category of funds to stay away from now is long-term debt funds. This category has had a good run while interest rates fell consistently over a period of three years. But with interest rates poised to rise again, these funds could be in for a bad time. If you want to pick mutual funds as an alternative to fixed deposits, consider liquid funds or short-term debt funds where the interest rate risks are much lower.
Choose Funds with Proven Track Record
Selecting the right funds to invest in especially for novices can be tough. Those who have been investing in the MF market for a while now know the importance of background check of a fund before loosening the purse strings. Don’t just go by a fund’s recent return alone. Check everything, from the fund manager’s track record to the credit ratings of underlying assets, from the expense ratio to fund PE ratio. Assess the growth record based on the tenure you want to invest for. For instance, if you want to invest in an equity fund that shows a return of 20% in the past one year, make sure you take a look at the returns for 3 years or 5 years to get a better picture if that’s the horizon you are planning for.
Tax Saving with Wealth Creation
MFs may be better known for creating wealth, but with ELSS funds, you can save tax too. Section 80C of the Income Tax Act allows you to claim exemption up to Rs 1,50,000 for ELSS investments. The LTCG tax on equity funds may worry you, but a 10% tax on long-term gains of more than Rs 1 lakh is the least compared to the taxes on other instruments like fixed deposits. Plus, you have to make a gain of over Rs 1,00,000 in a financial year to be paying that tax, which may not be the case every year.
Don’t Panic – Sell When You’ve Met Your Goal
The LTCG tax solely depends on how much you sell and how much you gain. So it is largely in your hands to balance the selling. Your strategy for sell should not be confused with anything. Sell it once you meet your goal. It’s vital not to panic in situations like temporary market corrections. Let the corrections pan out and stay invested. As the markets start rising again, you’ll be back on the way to achieving your goals.
(The writer is CEO at Bankbazaar.com)