The probability of negative returns is the highest for a one year holding period and over a seven year holding period the probability of a negative return from Indian equities (Sensex) is negligible.
Is there any possibility of capital erosion in large cap equity funds?
Yes, since they depend on performance of underlying stocks which may deliver negative returns as has been evidenced in the past. But it has been observed that as the holding period increases the probability of negative returns tend to reduce. The probability of negative returns is the highest for a one year holding period and over a seven year holding period the probability of a negative return from Indian equities (Sensex) is negligible. At an individual fund level this probability might differ based on the fund’s strategy and long term performance track record.
Can I withdraw the Systematic Investment Plan (SIP) accumulated for 12 months due to some exigencies. How much can be withdrawn or do I have to stop the SIP?
You can withdraw unless invested in a fund with a lock-in (ELSS, Retirement/Child Plans); however each investment amount may be subject to exit load if under the exit load period, which varies depending on respective scheme. It would be preferable to defer further SIP in order to handle your exigencies, since redeeming existing investments may attract exit load and capital gains, if applicable.
Do I have to pay long-term capital gains tax every year if I withdraw more than Rs 1 lakh?
For Equity: Capital gains tax needs to be paid on the capital gains exceeding 1 lakh and not on withdrawn amount. For Debt: Capital gains tax is applicable only if the investment has been held more than 3 years, and is taxed at 20% of the capital gains post indexation of costs or at 10% without indexation. If held for less than 3 years, the gains are added to income and are taxed at marginal tax rate as applicable.
Given the ILFS and DHFL default, should I start withdrawing money from my debt funds?
No, but you should evaluate your portfolios with the help of your financial advisor and move to high credit quality funds if deemed necessary.
(The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org)