Some investors are also exploring other options -mainly hybrid schemes- to maximize returns. Some are also contemplating what they will do if the government takes away the lower taxes on short and long term capital gains on equity investments.
Mutual fund managers and advisors say it is futile trying to fight the government when it comes to taxation. “We know by now that you can’t fight central banks like the RBI. Investors who tried to do that lost money in the last few years. Now we have to also add the central government to the list,” says a fund manager who doesn’t want to go on record. He explains that the government changed the taxation on both equity and debt in recent years and it may do so again in the future. “We have no control over these things. All we can do is to focus on our goals and investments,” the fund manager adds.
Some mutual fund advisors say they have been telling their clients to stop focusing only on the recent changes in taxation and making investment decisions. These advisors say several investors were contemplating investing in hybrid schemes to claim lower LTCG tax. Advisors say investors should remember that only equity schemes or hybrid schemes with higher equity allocations can claim this concessional rate. Investors should first answer the question whether they can take the extra risk and have the long investment horizon to invest in schemes that invest in equity.
Remember whether it is balanced advantage schemes, equity savings schemes, balance funds, or equity-oriented hybrid schemes, they invest in stocks. And stocks are always risky, especially if you are investing for the short term. These schemes are not suitable for short term investments. When you are investing in schemes with double-digit exposure to stocks, you should be extremely careful.
Finally, if you’re investing to take care of your short term goals, you should put the money in bank deposits or debt mutual funds. Yes, returns from both these options would be taxed at applicable individual tax rates. That means if you are in the higher slab, you need to pay taxes at the rate of 30% plus surcharges. But when you are investing for a short period (below three years), your priority should be to safeguard your capital, not earning more returns.
If you have at least five years, you may consider investing in balanced schemes, balanced advantage schemes, equity savings schemes, etc. These schemes can offer you better returns and better taxation. However, they are able to do so only because they invest in equity or use a combination of equity and arbitrage. If you are ready to take the extra risk, you can opt for them.
