Some of the mutual fund investments made in April-May this year are showing gains of about 40 per cent. Since they've been purchased less than a year ago, if I sell them to book profits, then I'll be liable to pay an exit load. However, there is no tax on capital gains up to Rs 1 lakh. In that case, will it be logical and wise to book some profits up to Rs 1 lakh?
- S.P.S. Jain
Somehow you have benefitted from this and basically, it is a reward for being brave because the period of April-May was very difficult for a lot of people. Even though the market was cheap, it was not a very easy time to invest because we had witnessed the markets falling freely in March.
Your understanding for booking profits right now up to Rs 1 lakh is for long-term capital gains and not for short-term gains. Whatever gains you realise from these investments right now would attract short-term capital gains of 15 per cent. For taking advantage of this Rs 1 lakh margin for booking tax-free gains, you may sell your older long-term investments who have earned some appreciation in capital for booking profits and re-invest it.
However, I've always said that one should be selling one's investments only if there is a need for meeting a goal. Another reason to sell could be that a particular fund has not performed up to your expectations over the long term. If your decision to sell is driven by market movements, then you would always tend to make a mistake while timing it.
The way you guessed correctly that markets would rally earlier this year, if you guess and decide to sell off now means that you are expecting the market to crash in the near future wherein you would benefit from selling. However, if the market rallies further from the current levels, then you would regret your decision. Where markets would go from here on is anyone's guess. So, I feel that if there is a small allocation of your bigger portfolio which has a gain of 30-40 per cent, then you may book profits on your older investments rather than this year's investment.
But also look at it from another perspective that timing the market correctly every time is very difficult and no one knows where the market will be headed in the near future. Many experts who had predicted the market have been wrong till now. Quarterly results of companies are being reported and in the case of many of them, 70-80 per cent of their business has seen a recovery. We are quite far from returning to normalcy i.e. getting back consumer confidence, businesses to recover and operate under normal conditions, etc. It is true that we are heading towards that direction, but the markets are behaving as if nothing has happened.
Liquidity has increased all over the world and as a result, we are seeing the markets rally. How long this liquidity-driven rally will sustain and whether it will rise or fall are not in our control and therefore, they are very difficult to guess as well.