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Ajit Mishra  | Answer  |Ask -

Answered on Jan 24, 2022

Amit Question by Amit on Jan 24, 2022Hindi
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Ramalingam

Ramalingam Kalirajan  |7103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 16, 2024

Asked by Anonymous - Oct 16, 2024Hindi
Money
Dear Sir...........out my three SIPs two are more than one year old and hence the gain earned so far on NAV units (of more than one year old) will qualify for LTCG. Whether it will be prudent to redeem these units ( of more than one year old) to avail benefit of Annual limit of Rs.1.25 Lakh of LTCG. Since these investments are for my long term goal, I will reinvest the redemption value received immediately in the same category of MFs and purpose of this exercise is just to avail benefit of LTCG tax exemption to the ANNUAL LIMIT of Rs.1.25 Lakh. Please suggest your valuable advice and will there be any negative impact on my overall investment.
Ans: it is admirable that you are already thinking about how to optimise your tax liabilities. When we talk about the Rs 1.25 lakh LTCG (Long-Term Capital Gains) exemption limit, many investors overlook this excellent opportunity to reduce their tax burden. Your proactive approach is commendable.

Now, regarding your query about redeeming units that are more than one year old, and reinvesting in the same mutual funds category to avail the LTCG exemption, it’s important to assess this strategy from a 360-degree perspective. Here’s a detailed and structured analysis to help you make an informed decision.

Understanding Long-Term Capital Gains (LTCG) and the Rs 1.25 Lakh Exemption
Long-term capital gains (LTCG) from equity mutual funds held for over one year are taxed at 12.5% if they exceed Rs 1.25 lakh in a financial year.

The first Rs 1.25 lakh of gains from your equity funds is exempt from tax each year. Hence, if your gains have crossed this limit, it's a great strategy to utilise this exemption.

By redeeming units that are more than one year old, you can realise the gains tax-free within the Rs 1.25 lakh limit and reinvest in the same funds, maintaining your investment horizon.

This approach works because any additional LTCG beyond Rs 1.25 lakh is taxed at 12.5%. Therefore, realising gains up to the exempt limit each year will help minimise your overall tax outgo in the long term.

Redeeming and Reinvesting Strategy
You mentioned that your investments are meant for long-term goals, so you intend to reinvest immediately after redemption.

Reinvesting ensures that you remain invested in the market and do not miss out on future potential growth. However, this strategy needs careful timing, as there could be minor costs in the form of transaction fees or exit loads if applicable, depending on the mutual fund you hold.

One key thing to remember is that reinvestment resets the holding period for the new units. So, when you redeem again in the future, the one-year timeline for LTCG exemption will start afresh from the date of reinvestment.

Despite this, redeeming and reinvesting to utilise the Rs 1.25 lakh exemption each year is an efficient way to reduce tax liability while keeping your long-term goals on track.

Impact on Your Long-Term Investments
The good news is that redeeming and reinvesting units of more than one year old should not affect your overall investment growth in the long run, as long as you stay committed to reinvesting the redemption proceeds into the same category of mutual funds.

Equity markets have their ups and downs. By staying invested and reinvesting promptly, you will continue to benefit from the potential compounding effect over time.

This strategy will not change your exposure to equities or alter the risk profile of your portfolio if you reinvest in the same mutual fund category.

The only minor impact may be the potential short-term volatility on the day you redeem and reinvest, which is usually negligible for long-term investors.

One point to keep in mind is market fluctuations. If the market is up at the time of redemption and down when you reinvest, you may lose some gains. However, for a long-term investor like you, these short-term blips should not be a major concern.

Evaluating Reinvestment Costs
Before proceeding with this strategy, ensure there are no exit loads applicable on the funds you plan to redeem. Exit loads, if any, are usually levied on units held for less than one year, so since your units are older than a year, this may not apply.

Transaction fees may also be incurred while redeeming and reinvesting. Some mutual funds or platforms charge small fees for each transaction. Although minor, over time these fees could add up, so it's essential to factor this in.

There might be a marginal difference between the NAV at the time of redemption and reinvestment due to daily market fluctuations. However, this impact is usually very small, and over the long term, the difference balances out.

As long as these costs are minimal and do not exceed the potential tax savings from the Rs 1.25 lakh LTCG exemption, the strategy remains sound.

Alternative Considerations
If the funds you hold are actively managed funds, redeeming and reinvesting makes sense, especially because actively managed funds are designed to outperform the market over time.

In comparison, index funds or ETFs, which only aim to match market returns, might not offer the same potential upside. This means that if you're redeeming and reinvesting in actively managed funds, your long-term potential for growth remains high.

Also, direct mutual funds may seem like a better option due to lower expense ratios, but when you're using an MFD (Mutual Fund Distributor) with CFP (Certified Financial Planner) credentials, you benefit from professional guidance. This helps in managing not only returns but also asset allocation, portfolio rebalancing, and overall strategy, which justifies the slightly higher expense ratios.

Regular funds, though they come with a marginally higher cost than direct plans, are worth it because of the long-term hand-holding and personalised financial planning they offer. This is especially useful for managing complex investment portfolios over long horizons like yours.

Long-Term Goals and This Strategy
Given that your investments are for long-term goals, the overall impact of this redeeming-reinvesting exercise on your financial goals should be minimal. This is because your fundamental asset allocation to equities remains unchanged.

By periodically booking tax-free gains, you are not only optimising your tax outgo but also managing your portfolio efficiently. Over time, this will add up to significant savings, which can be reinvested to enhance your corpus further.

Since your investments are linked to long-term objectives, such as retirement or other major milestones, staying disciplined with this strategy will help ensure that your wealth grows without unnecessary tax burdens eating into your returns.

Risk of Missing Out on Market Movements
One of the few concerns with this strategy is the risk of missing out on favourable market movements while your funds are temporarily redeemed. However, this risk is mitigated if you reinvest the funds immediately.

Markets tend to move unpredictably in the short term, but over the long term, equity investments generally deliver strong returns. By sticking to the plan of reinvesting quickly, you're safeguarding your investments from being out of the market for too long.

Also, if there are significant downward market movements during the time of your redemption and reinvestment, you might even benefit by buying units at a lower NAV.

Final Insights
Using the Rs 1.25 lakh LTCG exemption each year is a smart move to optimise your tax efficiency while keeping your long-term investment goals intact.

As long as the costs of redeeming and reinvesting (exit loads, transaction fees) are minimal, this strategy can significantly enhance your tax savings without negatively impacting your overall portfolio.

Reinvesting promptly in the same mutual fund category ensures you don’t miss out on market movements, and the long-term impact on your financial goals should remain positive.

Keep in mind that the reinvestment resets the LTCG clock, so continue to monitor and redeem accordingly to make the most of this tax benefit each year.

Regular mutual funds, when invested through an MFD with CFP credentials, offer additional benefits in terms of financial guidance, which should not be overlooked when managing long-term goals.

Lastly, this strategy is not just about tax savings—it’s also about maintaining and growing your wealth in a tax-efficient manner, ensuring you reach your long-term goals without unnecessary tax erosion.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

Latest Questions
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Ramalingam Kalirajan  |7103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 25, 2024

Money
I am 50 years old, how much proportion should I allocate in Debt and Equity mutual funds. I am investing in mutual funds only. My 43 L portfolio has 37 L equity and 6 Lak debt.
Ans: Balancing your portfolio between equity and debt is critical at this stage. A 50-year-old investor should aim for a safer portfolio while ensuring reasonable growth. Since you’re already investing in mutual funds, fine-tuning your allocation can optimise returns and reduce risk.

Let’s assess your portfolio in detail and identify actionable steps for an optimal balance.

Evaluating Your Current Portfolio
Your current allocation includes:

Rs 37 lakh in equity: Around 86% of your total portfolio.
Rs 6 lakh in debt: About 14% of your total portfolio.
This equity-heavy portfolio is suitable for younger investors. At 50, you may need to rebalance to reduce volatility while retaining growth.

Recommended Allocation Strategy
A general rule is the "100 minus age" approach. However, personal goals, risk tolerance, and financial stability should guide decisions. For a 50-year-old:

Equity: 50% to 60% of the portfolio. This ensures growth and combats inflation.
Debt: 40% to 50%. This ensures stability and predictable returns.
You can adjust within this range based on personal preferences and financial objectives.

Steps to Rebalance Your Portfolio
To align your portfolio, consider these steps:

Gradually reduce equity exposure: Shift some equity investments to debt. Do this systematically over months to avoid timing risks.
Increase debt mutual funds allocation: Consider short-duration or dynamic bond funds for liquidity and moderate returns.
Use hybrid mutual funds: Balanced advantage funds can offer a mix of equity and debt with automatic rebalancing.
Why a Balanced Allocation Is Crucial
Equity: This provides growth potential to counter inflation. It supports long-term financial goals like retirement planning.
Debt: This offers stability and acts as a buffer against market downturns. It ensures liquidity for unexpected expenses.
Avoid Over-Exposure to Equity
While equity delivers higher returns, excessive exposure can increase portfolio risk. A balanced allocation shields you during market corrections.

Advantages of Actively Managed Funds
Actively managed funds can outperform the market due to professional expertise. They adjust portfolios based on market trends and opportunities.

Disadvantages of Index Funds:

They lack active monitoring during volatile periods.
They mimic the index, limiting scope for higher returns.
Their fixed composition may underperform in certain market cycles.
For long-term growth, actively managed funds offer better risk-adjusted returns.

Benefits of Regular Funds Over Direct Funds
Guidance: Regular funds come with expert advice from an MFD with a Certified Financial Planner (CFP) credential.
Portfolio Monitoring: They help align your investments with changing market conditions.
Support: MFDs can guide in tax planning and rebalancing.
Direct funds, while cheaper, may lead to uninformed decisions and missed opportunities.

Tax Efficiency in Your Portfolio
Understanding new mutual fund taxation rules is essential:

Equity funds: LTCG above Rs 1.25 lakh is taxed at 12.5%. STCG is taxed at 20%.
Debt funds: Gains are taxed as per your income slab.
Consider tax implications before rebalancing to avoid unnecessary liabilities.

Maintaining Liquidity
At this stage, maintaining a portion of your portfolio in liquid funds is prudent. It helps meet short-term goals or emergencies without disturbing long-term investments.

Aligning with Retirement Goals
Your portfolio should focus on generating a steady post-retirement income. Here’s how:

Allocate more to debt as you approach retirement.
Use SWP (Systematic Withdrawal Plan) for regular income during retirement.
Retain a small equity portion to combat inflation even post-retirement.
Creating a Contingency Fund
Set aside a separate fund equivalent to 6-12 months of expenses. Use liquid or ultra-short-term debt funds for this.

Monitoring and Reviewing Your Portfolio
Review your portfolio every 6 months.
Rebalance based on market conditions and life changes.
Consult a Certified Financial Planner for adjustments aligned with your goals.
Avoid Common Investment Pitfalls
Chasing high returns: Avoid concentrating on high-risk funds at this stage.
Over-diversification: Stick to a manageable number of funds to track performance easily.
Ignoring inflation: Ensure your portfolio grows faster than inflation rates.
Building a Long-Term Perspective
Focus on wealth preservation alongside growth.
Maintain discipline in investing. Avoid reacting impulsively to market fluctuations.
Stay informed about economic and market trends affecting mutual fund performance.
Final Insights
Balancing equity and debt is essential for stability and growth in your portfolio. A 50%-60% equity and 40%-50% debt allocation aligns with your age and goals. Active management and regular reviews will help optimise returns and minimise risks.

Transitioning gradually ensures minimal disruption to your portfolio’s growth. Focus on creating a robust strategy to secure your financial future.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

Ramalingam

Ramalingam Kalirajan  |7103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 25, 2024

Money
One time investment in mutual fund in which fund
Ans: To decide on a one-time investment, understanding your financial goals is vital. Knowing the purpose of your investment ensures better alignment with your expectations. Your goals could be wealth creation, retirement planning, or funding a specific future expense like a child's education or marriage.

Assessing Risk Tolerance
Before choosing any investment, assess your risk tolerance. High-risk options offer better returns but can fluctuate more. If you are a conservative investor, you might prefer stability over high returns. Moderately aggressive investors balance growth and risk well.

Benefits of Actively Managed Mutual Funds
Actively managed mutual funds are an excellent choice for one-time investments. Professional fund managers make critical investment decisions based on market conditions. These funds can outperform market indices over the long term due to their strategic asset allocation.

They adapt well to market dynamics, offering higher growth potential than passive funds. Investors benefit from expertise and insights that help mitigate risks during market downturns.

Disadvantages of Index Funds
Index funds simply track market indices and lack active management. They offer no scope for market-beating returns. While their fees are lower, this comes at the cost of performance. In actively managed funds, expert decision-making can lead to better results.

Investors relying solely on index funds may miss opportunities to earn superior returns. Active funds also better suit those aiming for long-term wealth accumulation with reduced volatility.

The Issue with Direct Funds
Direct funds may have lower costs but require greater knowledge and time. Without professional advice, managing such investments can be overwhelming. Regular funds, managed through Certified Financial Planners, ensure guidance tailored to your needs.

A Certified Financial Planner monitors your portfolio’s performance, suggesting timely corrections. This professional approach ensures that your investment aligns with your financial goals efficiently.

Choosing the Right Mutual Fund Category
Select funds based on your investment horizon and risk appetite. Equity mutual funds work well for long-term goals as they provide higher growth potential. However, they carry higher volatility and are suitable only for investors with a longer time horizon.

For medium-term goals, balanced or hybrid funds are better suited. These combine equity and debt to balance risk and returns. Short-term goals are better addressed with debt funds, offering lower returns with minimal risk.

Importance of Diversification
Diversifying your investment reduces the risk of losses. It spreads your money across various sectors, ensuring market fluctuations impact your investment less. Avoid investing all funds in a single category, ensuring a mix of equity, debt, and hybrid funds.

Taxation Rules for Mutual Funds
Understand the tax implications before investing. For equity funds, long-term capital gains above Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains are taxed at 20%. For debt funds, all gains are taxed as per your income tax slab.

Consider tax-saving options if your goal aligns with reducing tax liabilities. While tax efficiency matters, it should not override your primary objective of wealth creation.

Importance of Lump Sum Timing
Market timing matters for one-time investments. Investing during a market correction or when valuations are reasonable ensures better growth. A Certified Financial Planner can guide you to enter the market at the right time for better results.

Monitoring and Reviewing Your Investment
A one-time investment is not set and forget. Regular reviews ensure the investment aligns with your goals. Markets evolve, and so should your portfolio. Make changes as required with the guidance of a professional.

The Role of Emergency Funds
Ensure you have an adequate emergency fund before making a one-time investment. This fund covers unforeseen expenses, preventing you from withdrawing long-term investments prematurely. Keep at least 6-12 months' expenses aside for emergencies.

Setting Realistic Expectations
Investments are subject to market risks, and returns are not guaranteed. Patience and a long-term approach yield better results. Understand the product before investing, ensuring it meets your expectations and financial objectives.

Final Insights
A one-time mutual fund investment can help achieve your financial goals effectively. However, aligning this investment with your risk tolerance and objectives is key. Actively managed funds, combined with professional advice, offer the best value for your money.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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