A higher price for mutual fund mistakes

Since the Union Budget 2018, all of us who invest in equity mutual funds are now paying a much higher price for choosing the wrong funds. I suppose most of you would have recognised that date as the beginning of the (re)imposition of long-term capital gains tax on equity funds. What investors don't often realise is that the 10 per cent tax that the government charges is just the root cause of your problems. The real problem is far greater.

Earlier, realising that a fund you had invested in and then switching to a better one was basically cost-free, as long as at least a year had passed. You earned a little less and then sold off and every rupee could be shifted on to the next fund. Now, when you shift, 10 per cent (plus any surcharge) of your gains have to be paid as tax.

Over the course of a 10-15-year investment, if you end up shifting your money three or four times, you lose 10 per cent of your gains every single time. But that's not the only impact. The money that you pay off as tax does not get added to the next investment, and does not grow. That means that the final impact of the simple 10 per cent tax is far greater. Depending on how you switch funds, it could double that or even more.

Moreover, because of the way this missed opportunity actually hits you, most of the time you will not have any idea of exactly how much the hit was. It requires a complex calculation that combines multiple tax payouts and a separate stream of compounding opportunity costs. Almost always, an investor would just see each event as a separate hit of a nominal 10 per cent.

But that's not all. There's yet another problem that investors are facing. The 10 per cent tax is making the decision-making more difficult. You are invested in a fund that is doing slightly worse than many others. Earlier, once you were convinced of its problems, you could switch immediately once one year was out - no second thoughts required. Now, you have a more complicated if-then-else scenario. The fund is doing badly, but how much worse? Will it have more of an impact than the 10 per cent tax plus future returns from that 10 per cent? Or is it better to continue with an inferior fund or is it better to take the tax hit. Maybe the fund will improve; maybe it will not.

There's no way of making this trade-off logically because the information that you need is in the future. There will always be an element of guesswork. Sometimes you will be right; other times you will be wrong. When you turn out to be wrong, you may be tempted to make yet another switch and then the same conundrum will be back. There's no easy way out.

However, what all this does mean is that it is much more important to invest carefully in funds where there is a high likelihood of staying for years on end. A quick evaluation based on past returns or a star rating that you check on Value Research Online cannot be the basis of either investing or selling out.

The premium on being right is much higher and the best way of realising that premium is Premium (apologies for the wordplay but I couldn't resist it because it conveys the idea perfectly). This is very much the kind of problem that Value Research Premium will solve for you. There are three aspects of our Premium service that will help here:

1. You get to use our algorithmic fund selector to choose the type of fund that is most suitable for you.
2. Within that type, you will get to choose from a set of handpicked funds that I and my analyst team have chosen for you.
3. As time passes, we will keep an eye on how funds evolve and will signal to you the right time when it makes most sense to switch funds.

Essentially, when you become a Premium member of Value Research Online, you get access to the highly targeted and goal-oriented work that our analyst team does. This is not something that an individual can do, even with the help of the data-driven content that our non-Premium members have access to for free.

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The headline features

Portfolio Planner: Custom portfolios that are suggested to you as part of your Premium membership. The algorithm that we have evolved takes into account your goals, your income, your saving capacity and a number of other factors.
Analyst's Choice: Often, investors want to choose their own funds for some particular investment purpose. As a Premium member, you will have access to Analyst's Choice, where 570 total funds are narrowed down to 45 handpicked ones (as on June 30, 2022).
Portfolio Analysis: Only a few members are starting their investing from scratch. For most of you, a big question is whether your existing investments fit into your goals? You can get an evaluation and a suggested fix-list based on our expert teams' inputs.

Those are just headline features. There are a lot more that will help you keep track of your investments, returns, diversification, taxation and practically everything else that will help you achieve your financial goals.

So, head over to vro.in/premium, read more details of these features, see glimpses of what Premium has to offer, read testimonials of our members and subscribe at a discount of up to 30 per cent.