Don’t rush to sell the funds
Whenever such major news hits the market (or you), the first thing you should do is to avoid taking any decisions. Many investors tend to panic and sell or stop their investments the moment they hear anything negative. For example, a major fall in the market drives many new investors out of the market. Don’t make mistakes. Take a deep breath and wait and watch the situation. Yes, the Lok Sabha has passed the amendment. It may be passed by Rajya Sabha, too. However, intensive lobbying is happening behind the scenes. Sure, we know by now the mutual fund industry is unlikely to influence the government to reverse the decision. However, they may succeed in impressing the Sebi to tweak the guidelines so that they can launch new products that may qualify for long-term capital gains tax with the indexation benefit. Wait and watch. And avoid taking any decisions in a hurry.
Don’t look for shortcuts
We discussed it in the beginning. Many investors are looking for a way to avoid paying the extra tax and claim indexation benefit. Many so-called experts are also coming up with solutions. We believe these half baked solutions are unlikely to serve your interests in the long term. Accept it: the government has decided to tax debt schemes like bank fixed deposits. You can’t do anything about it. In fact, many mutual fund managers were saying in private that it seems the government is likely to do away with deductions and exemptions. So be prepared to pay more taxes on your investments in future. Don’t fall into the trap of trying to beat the government. When the government does something, most probably it would have done the homework and plugged all the loopholes. So, don’t waste your time looking for a smart way out.
Don’t invest anywhere in a hurry
This follows the last point – in their hurry to make some smart moves many investors are falling for wrong sales pitches. Some experts are suggesting shifting the money to a different asset class or mutual fund category. Most of these suggestions are based on the likely returns from these investments and taxation on them. This is the wrong way to approach your investments. You should always base your investment decisions on your goals, investment horizons, and risk appetite. Focusing only on returns and taxes would lead you to wrong investment decisions. As said earlier, wait for sometime. Take a decision only if you know what the industry is going to do and what works best for you.
Always place yourself in the picture
We always believe that individuals should focus their needs rather than zeroing on the new developments. Your investments are designed to meet your financial goals. For example, if you are investing for a few years to take care of your short term goal, you don’t have an option but to keep the money in a safe avenue like bank deposits or debt mutual funds or bonds. Just because debt funds are going to be taxed higher from the next financial year, doesn’t change anything. You can’t invest in equities for better returns and taxation. When you are investing for a short period, your focus should be on the safety of your investments. Not the returns and taxes. When you are investing for a short period, you don’t have the luxury of time.
Don’t focus only on taxation
Equity mutual funds were taxed a few years ago. LTCG on debt schemes were tweaked a few years ago. Now, the government has decided to withdraw LTCG on debt funds. The only lesson we can learn from history is not to place undue importance on taxation of investments. Some favourable taxation may be there on some investments, but there is no guarantee that they may be there in the future. When equity mutual funds were taxed, many investors were very angry. They swore they won’t invest in equity schemes anymore. Similarly some investors were determined to stop investing in debt schemes because of earlier tweaks on LTCG taxation. Some investors may be in a similar frame of mind now. Always remember we are investing in debt schemes or bank deposits to meet our short term goals because we don’t have any other choice. Similarly, we are investing in equity mutual funds to achieve our long term goals as they offer the best returns over a long period. Sure, lower or better taxes is an extra reason. If it is not there in the future, we still need to invest in them to achieve our goals.
