Beyond taxation

The cover story of 'Mutual Fund Insight' May 2023 issue is about making more tax-efficient investments. While the story is nominally triggered off by the changes made to the tax structure of certain categories of funds in the Union Budget just before it was passed, one more reason is just as important. In the days following this change being made, there was a spate of high-pressure misselling of funds and other investments using this change as a pretext.

From March 24 to March 31, 2023, mutual funds and their salespeople attempted to incite a buying frenzy in response to the new taxation rule that took effect on April 1, 2023. You can read the tax details in our cover story, but salespeople kept encouraging investors to redeem other investments and reallocate that money into these fund types. Some AMCs even reopened large investments in international funds until March 31, 2023 to capitalise on the panic they are promoting.

The truth is that if you weren't already planning to invest in these funds, there was no substantial benefit to doing it at that point. The tax on returns from investments made at the time remained the same as before, as did the nature of the funds. If these funds weren't appropriate for your financial goals till March 23, they remain unsuitable after that date also and will continue to be in the future. Essentially, these salespeople push investors to choose specific funds based on future tax increases, without considering whether the funds suit the individual. This approach is illogical and a disingenuous way to treat investors.

An investment's tax efficiency only means how effectively it minimises tax liabilities, which can impact your overall returns. While this is an important consideration, it should not be the primary focus when making investment decisions. Rather, the suitability of an investment to your financial goals should take precedence. Your financial goals encompass a variety of factors and specific objectives. Ensuring that an investment aligns with these factors is the primary factor in achieving long-term investing success. By focusing primarily on tax efficiency, you are more likely to choose investments that could be better suited to your life inadvertently. Tax is an important part of the investment story, but by no means is it the major one.

Mutual funds should be a simple, almost handoff way of investing. Unfortunately, a large contingent of people is determined to complicate things. Some of them are doing it for professional and business success, and others just to be social media 'influencers'. The mantra of simplicity that Value Research has espoused for decades runs counter to this.

The recent tax changes have often been referred to as debt fund tax changes. However, let it not create the impression that we're anti-fixed income. Even though, as regular readers, must have noticed, I have often lamented the excessive reliance on a fixed income that Indian savers are prone to. India has traditionally been a 'fixed-income country'. Generations of savers turn automatically to savings instruments like PPF, bank deposits, post office deposits, etc., for all their savings needs. On the other hand, it increasingly looks like that a certain proportion of younger savers have taken to the equity mantra a little too much. Savers who start investing in equity mutual funds and have a good experience tend to go almost 100 per cent into it. This is as much a mistake as being too much into fixed income.

It's a fact of Indian investing life that fixed-income taxation has been more of a challenge than equity taxation. In a strange way, the current changes simplify it. Moreover, for those in the zero or the lowest tax brackets, it actually means less tax. Having said that, (legally) paying less tax is everyone's right, and our cover story of 'Mutual Fund Insight' May 2023 issue shows you how to do that without compromising your investments.

Suggested read: Is the debt fund tax a big deal?