Reader's Corner: After LTCG tax, will realty replace equity as asset class?

I am 42 years old. I have been a regular investor in mutual funds. Now with the Budget introducing 10 per cent long-term capital gains tax (LTCG) on equities, is there any other asset class  that is more tax efficient and offers double-digit returns. Can I now look at real estate?

You should not look at any other asset class. For long-term wealth creation, equity remains the best compared to all other asset classes. Real estate can be the second best asset class with returns at 9-10 per cent. But equities have delivered 15-20 per cent annual returns in the past. If you consider compounding on such returns, you can create a significant corpus.

When investing, don't take a decision solely on its taxation. Who knows, the government can even withdraw LTCG tax in the future. Also, remember that long-term capital gains up to Rs  100,000 in a year are not taxed. It is a huge relief for retail investors. If you plan your redemption well, you may not even need to pay tax on the withdrawal.

My stock broker offers systematic investment plan (SIP) in stocks. It has select large-cap Sensex companies on offer. I already make investments through mutual fund and wish to allocate small amount directly to stocks to understand how it works. Is SIP in stock a good idea?

Kartik Jhaveri

SIP in equities is not quite the same as doing SIP in a mutual fund. The fundamental difference to understand is that in an equity portfolio you are responsible for all decisions. The broker is not going to tell you what to sell and when. So you can consider SIP into equities under the circumstances where you are planning to buy a stock or a basket of stocks and want to hold it forever. Also, you will have to keep monitoring the financial health of the companies that you’re going to buy through SIP. You will also need to diversify stocks. Calculating capital gains on direct equity investment via SIP can be quite a headache. Against this, by doing an SIP in a mutual fund, all your worries are taken away and a professional team is taking care of your portfolio.

I have a term plan of Rs  500 million that was bought because of the house I purchased. Since then, my assets, income and liability have grown. Should I just keep buying new term plan as my assets, income and liabilities rise or are there other ways to manage the life insurance needs that I have?

The primary objectives of life insurance are; to safeguard living expenses in case of death of the main bread earner, provide protection to dependents against the existing liabilities and to make provisions for large financial obligations of the dependents. Therefore, if any of the above increases, it is advisable to increase the term plan.

However, life insurance is a risk management tool that provides you cushion against assets that you have not yet created. As you start building your assets, over time, you should aim to reduce your dependency on life insurance.

I want to invest in a debt fund for two years. Should I look at short-term funds or arbitrage funds are a better option?

Short-term bond funds are the ideal candidate for a debt-based investment for a period of one to two years. Investment in this type of fund would practically eliminate taxes if they were held for three years or more. Arbitrage funds were introduced to provide higher tax efficiency and reduce the holding period to just one year, as investments would be based on arbitrage opportunities in equity shares. So the returns were expected to be in line with debt funds but with a lesser holding period from a tax point of view. But the government has now introduced LTCG tax on equities and gains from arbitrage funds will now be taxed. Also, there is no guarantee that arbitrage funds will outperform short-term bond funds. 

The writer is director, Transcend Consulting. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in