Why Growth Equity Mutual Funds is Still a Good Investment Option After The Introduction of LTCG Tax
Finance Minister has introduced Long-Term Capital Gains (LTCG) tax in the Budget 2018. According to the modification, LTCG on equity funds will be taxed at 10% when profits exceed INR 1 lakh per year.
As a result, it is expected that some investors may move from equity funds to other investment instruments. Investing in Unit-Linked Insurance Plans (ULIPs) may seem an attractive option in the light of this new change. ULIPs are hybrid insurance products, which provide life coverage as well as an investment option.
ULIPs invest some portion of the premium in debt and equity instruments. ULIPs are insurance products, which mean maturity proceeds are tax-free. Partial withdrawals are also not taxable. Additionally, investors may claim tax deductions under section 80C of the Income Tax Act on the premium paid to avail of the insurance plan.
However, even with the introduction of the LTCG tax, investing in mutual funds continues to be a good investment option. It is expected to decrease portfolio churning and mis-selling, which will be profitable for individual investors.
Here are four reasons why growth equity mutual funds continue to be a promising investment option.
1. Achieve long-term financial objectives
It is recommended that investors reconsider the primary reason why they opted to invest in equity funds. The primary objective of such investments is to build wealth that enables investors to meet their long-term financial goals. Compared to most other investment instruments, equity mutual funds have the potential to deliver highest returns when you stay invested for a longer period.
2. Return on investment (ROI)
Even if the Finance Minister has taken away the LTCG tax benefits of investing in mutual funds’ equities plans, these are still an excellent investment choice. This is because even after investors deduct the 10% LTCG tax, the returns exceed most other investment products such as Public Provident Fund (PPF), National Pension System (NPS), tax-saving fixed deposits (FDs), Employee Provident Fund (EPF), and others. Therefore, it is recommended that individuals continue investing in such funds even with the introduction of the new tax.
3. Avoid combining insurance and investment
The new LTCG tax, that is applicable when an individual opts to invest in mutual funds online or offline may make ULIPs more attractive. However, one must reconsider before making their decision. Most experts recommend that individuals must not combine insurance with investment. Insurance is important to avail of life cover in case of an untoward incident while investments are primarily to meet various financial objectives. A term plan is the best way to avail of maximum coverage at an affordable premium. Additionally, ULIPs may not be easily liquidated due to poor returns. Moreover, when an individual exits the ULIP, the insurance coverage also ceases.
4. Increase in demand for equity funds
The equity schemes offered by mutual funds have seen a significant rise in demand during the last few years. During 2017, nearly INR 1.5 trillion was invested in such schemes, which included tax-saving plans like Equity-Linked Savings Schemes (ELSS). The primary reason for this increase has been the capability of equity funds to deliver superior returns when compared to various other asset classes. A 10% LTCG tax is not expected to majorly affect the inflows into such schemes.
5. Introduction of the Dividend Distribution Tax (DDT)
The Finance Minister has introduced a 10% DDT on the dividend option of equity funds in his Budget 2018. This will reduce the net earnings for the investors. Asset management companies (AMCs) may realign the dividend distribution strategy. Individual investors may need to pay higher taxes in the short-term. This makes growth equity schemes attractive because LTCG below INR 1 lakh is not subject to the 10% tax.
Individuals who want to invest in mutual funds online or offline need to conduct in-depth research and analysis of various schemes. They may have neither the experience nor the expertise to carry out such an analysis. To overcome these limitations, they may use technology to make accurate investment decisions.
Several online tools are available, which make such analyses simpler. One such product is ARQ from Angel Wealth, one of India’s renowned financial service provider. ARQ is an automated investment engine, which uses scientific methods like quants and algorithms to carry out an analysis of the various equity funds. As a core highlight of Angel Wealth’s mobile application, the investment engine matches the most appropriate schemes to an individual investor’s risk profile, lifestyle, and financial objectives. The entire procedure is automated eliminating all human bias and interference.
An investor just needs to download the Angel Wealth mobile app and receive customized recommendations on smart devices such as phone or tablet.