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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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Please advise regarding:

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Aurobindo Pharma 75 @902 Hold
Berger Paints 62 @815 Hold
Lauras Lab 10 @663 Hold
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Ramalingam

Ramalingam Kalirajan  |7012 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

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I am a 30-year-old woman from an upper-middle-class business family. I've been in a relationship for the past four years with a man who holds a government job, while I recently completed my MBA and started working at a reputable company. He comes from a modest background, and we are from different castes. About a year and a half ago, I introduced him to my family as a potential partner, but they were strongly opposed to the idea. At the time, I decided to let it go, but now I feel compelled to try again. However, I’m uncertain about how to approach my parents, and with time passing, I find myself questioning the decision to marry someone from a different background. What should I do?
Ans: First, it might be helpful to reflect on your relationship itself. After four years, you likely know each other well, and it’s good to take stock of what you value in your partner. Think about whether you see a long-term future together, especially in terms of shared goals, values, and mutual support. These are the foundational elements that matter most, regardless of background or status. If you’re truly aligned, you can have confidence that you’re making a choice based on a solid partnership.

If you’re still sure about moving forward, you can prepare to approach your parents again. This time, try focusing on helping them see him as a person rather than through the lens of caste or financial background. Highlight his qualities—his character, values, work ethic, and the positive impact he has on your life. Family resistance often stems from fears about compatibility or security, so if you can show them that he’s a stable, dependable person who brings happiness and balance to your life, it may help ease their concerns.

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hello, I'm a 49F married for 21years. It was an arranged match, and from day one my husband and sister have not gotten along. I've also been naive and under my sister's control for a long time, which has angered my husband a lot. In March they both had a verbal altercation and have not been on talking terms. Now my husband is not letting my 18y son meet my sister. My husband is demanding a sorry from my sister, post which only my son can meet her. I'm really sad as my sister dearly loves my son, also I don't feel its morally right to involve children in family politics. And my sister will not apologize to my husband. Need help to understand on how to get my innocent son out of this mess. My husband is very controlling, very angry, very interfering person, overall he has a very negative perspective on everything.
Ans: It might help to approach this from a place of calm and clarity, starting by recognizing that both your husband and your sister likely feel hurt in their own ways. Your husband’s demand for an apology may come from years of built-up tension and perhaps a feeling that he hasn’t been supported in the past. On the other hand, your sister may feel hurt or defensive, making her unwilling to apologize. While it would be ideal for them to resolve this between themselves, you’ve noticed that it’s now affecting your son, and you understandably want to protect him from being caught in the middle.

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This might take time to work through, and that’s okay. In the meantime, keep reassuring your son that he’s loved by everyone. Explain to him that sometimes adults have disagreements, but it doesn’t change the fact that he’s cared for. Keeping those bonds strong now could help everyone come to a better place down the line.

This is a tough situation, but focusing on your values—family harmony and your son’s well-being—can help guide you through it.

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Pradeep, I am a professional with more than 17 years of experience in Operations, team management. Currently I have started working in a global MNC in a global position. Earlier I was working with the same organization for more than 10 years. Then during Covid, I lost my job. Finally, settled down with another company with almost 40% less salary. Though I loved the role and responsibilities there. I was a Senior Team Lead there. I liked the role where I was managing the team, working with the team. But due to some internal politics, I lost my job in that organization too in this year only. Why I am saying politics? Because just before they fired me, I got best performer award and best employee of the last quarter 2024 award. Then I rejoined my old organization with lots of hope. But now I am finiding it difficult to cope up in this global role. The top management expected me to know everything within 3 to 4 months and start delivering. One of the biggest hurdle that I am facing is that earlier when I was in this organization for more than 10 years, I was in another process. This time I got in a role where the process is completely different. Also no proper training is provided. I am not get a fulfiling satisfaction from this role. Also I am not able to get job satisfaction and now I am thinking of quitting and start something of my own. A business venture or a consultancy service. But not sure how to start and also afraid of the flow of income. I have a mother who is suffering from age related problems. Have a little kid of 12 years. My wife is not working. I tried to switch jobs. But it seems that no one is there to take someone who is almost at 45 years of age. I am loosing my hope and confidence day by day. Please help.
Ans: Dear... Request you to mention the question in precise way to understand what exactly you require from us. Big question normally indicates state of confusion somewhere hence difficult to repply which will satisfy you.

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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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