I am invested in a credit risk fund which is performing poorly. It is not even giving six per cent return and has been rated one star on your website. However, I have not completed three years and liable to short-term capital gains tax, if I reddem them now. Should I exit or wait for three years to complete. I am in 30 per cent tax bracket.
If you are close to three years, then wait. Say if you are done with two and half years or more. Because if it's a large sum of money and six per cent gains for two years, all of it will be treated as your income. So if it's a crore of rupees and you have earned 6 per cent over the past two years, then it will be an income of Rs 12 lakh. And you are in the 30 per cent tax bracket, so it will amount to a tax bill of Rs 3.6 lakh. So it depends on how close you are completing three years and are able to get the indexation benefit.
I am not sure which fund you have invested in. But some of these funds, if they held IL&FS bonds may also have some resolution. Because the way mutual funds are designed are that the moment such accident happens, the value decline happens that day itself. The fund companies are supposed to write it off in their books immediately. So investors find it a big blow. But if some resolution happens, a part of the capital comes back, then a good part of your money may come back too.
This article was originally published on December 19, 2018.
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