There is a widespread rumor that the Long Term Capital Gain rule is expected to change in the forthcoming Budget 2017 on Feb 1, 2017. Me and lot of advisors are receiving call whether they should book profits? The current rule says that if you hold an equity mutual fund scheme for one year and then exit the gains earned are tax-free. But if it changes, does it impact your investments? Agents/Mutual Fund Distributors are creating panic and making investors exit from equity schemes to book profits. Is it required? Is it justified? Are there any risks? Let’s check this today in this short note.
The Long Term Capital Gain Rule of Equity Mutual Funds
To understand this we have to look at the mutual fund taxation. Let this picture demonstrate what I want to say:
So what change is anticipated?: LTCG is not taxed at the moment. To qualify you need to hold the investment for one year only. This tenure of holding may be up from current 1 Year to 3 Years.
The rule of availing LTCG is not getting withdrawn. Otherwise, there would have been a very negative reaction already as various investors would have realigned their portfolio as per new anticipated rule.
One year rule for LTCG: Has any sensible Advisor or Agent approached you to invest in equity mutual funds for less than 5 years? If yes dump him immediately. He is trying to do a damage which probably he understands but still committing it.
So if your portfolio or equity investments are for more than 5 years, why would it impact you? In fact, there may be speculators who enter in and exit just trying to time the markets and make a quick buck (which they never can) and unnecessarily bring volatility to the markets. It’s better those people will move away and more serious players, value investors and long-term investors will step in.
On a personal note, I think all equity investments should be at least made to stay for 5 years, including the ELSS, Direct Equity or Mutual Funds or ETFs. Markets are pit shops, these are assembly lines. Need a lot of time and process to work.
It is good for market stability that people have a long-term view of markets rather than having a fly-by attitude.
What should you do? So should you exit now?
NO… the main reasons for this are:
- First of all, you should not react or change portfolio because of rumors. This is just a Whatsapp rumor as of now that CBDT (Central Board of Direct Taxes) has already issued a circular. But it has not come from any official source. In fact Mr Jaietly has declined any such rumor.
- Anything declared in the budget is discussed in parliament, enacted then sent to President for his annexure. Then only the provisions This will give sufficient time to act. No retrospective provisions will be announced.
- You should think to exit only if your horizon is ending within coming 3 years or you require funds or your goal is maturing within coming 3 years. Than if you have historical profits you may exit. If investments is for more than 3 years – Stay Invested. Do not change your portfolio.
- Unnecessary exit advice that you are getting from your agent or mutual fund distributor will increase your portfolio churn. Also, there will be reinvestment risk as markets are already in above 20 PE (price earning ratio) region (overpriced).
Believe in long term power of equity investments. This is another episode when an investor should keep a check on their behavior.
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