How do I reduce my capital-gains tax?

Dharmesh, 45, is a seasoned investor. He has been investing in equity funds for the past 20 years and has been able to accomplish several goals with the help of his investments. However, over the years, his portfolio has become cluttered with funds across various themes, sectors, market caps, etc., thereby making it difficult for him to manage it. He now wants to consolidate his portfolio and invest in a few good funds. But when it comes to restructuring a portfolio by selling some of the funds in it, one has to pay tax on capital gains. So, he seeks our help to reduce his capital-gains tax. How many funds are enough? At present, Dharmesh is investing in 15 funds, including two tax-saving, two small-cap, three mid-cap, three thematic, three flexi-cap, one value and one large-cap fund(s). Ideally, an investor should not invest in more than four-five funds. For most investors, investing in two-three flexi-cap funds and one-two tax-saving funds is enough. Also, for proper asset allocation and rebalancing, one should also invest in one-two short-duration debt funds. Flexi-cap funds invest across the market-cap segments and sectors and therefore provide investors with adequate diversification. Tax-saving funds, or equity-linked savings schemes (ELSS), are also managed in a flexi-cap style. One can invest up to Rs1.5 lakh in these in a financial year and get tax exemption on that amount. These days many investors also want international diversification, so one can explore adding one-two international funds and investing not more than 25 per cent of your corpus in these. Do n

This article was originally published on March 02, 2022.