Some investors like to treat their mutual fund investments like a game of cards. They try to make some short-term gains and quickly prepare to walk away with the profits. *Meera found herself in a similar situation like this. She had invested in diversified equity funds a few months ago and was surprised to see her NAV of mutual funds (Net Asset Value) appreciate by 15% so quickly. It was sheer luck that her investment timing coincided with a strong rally in the equity market.
But having gained 15%, she was in two minds. Should she book the profits now or hold on to earn more? One of her friends, with a mathematical bent of mind, figured out for her that she had already made an impressive 75% on an annualised basis. So her obvious advice was to book the profits. However, is that the correct approach? Do short-term investments tend to chop off your NAV gains?
How are short-term investments harmful to your NAV of mutual funds?
First of all, while the current rise might seem like a blip, a strengthening Indian economy is likely to lead to even higher equity values.
Second and more importantly, it’s important to look at the true returns rather than getting carried away with high percentage numbers. Meera had invested Rs 1 lakh into equity funds in March’15 and the funds’ NAV has appreciated by 15% since then. If she redeems her funds now, she will make an absolute profit of Rs 15,000 on a pre-tax basis. However, what she would actually receive is justRs 11,495 (around 25% lower) reducing her 3-month return to 11.5% of the investment. But how’s that possible?
This is because most equity funds today are accompanied with exit loads, a kind of penalty levied for selling a fund in less than a year. These loads are usually 1% of the NAV at the time of sale. In the case of Meera, she would have to pay Rs 1,150.
In addition to that, Meera would also have to pay taxes on her profits. Indian tax rules demand higher taxes for short-term profits as compared to long-term profits on equity funds. Any capital gains earned on long term investments, also known as LTCG gains (gains from funds redeemed after a year or so) made would have zero tax liability. However, a short-term capital gain, STGC gains (gains from funds sold within a year) would attract an effective tax of 17% (16.95% to be exact). Since Meerasold off her units within a year (3 months to be precise), STCG tax would be applicable, which would chop off Rs 2,355 from her realized gains.This leaves a profit of just Rs 11,495 and not Rs 15,000 on a lakh of investment. Let’s take a look at the following table:
That being said, invest in mutual funds after realising your financial goals, risk appetite and investment horizon. There are different types of mutual funds available to meet the needs of the investors. So invest in mutual funds online accordingly. Happy investing!
The above example is only for illustrative purposes and should not be relied upon as an accurate indication of any financial need.
Please visit FXChoice Review for more information.
