Why Not To Quit Equity Funds?

These were the imposition of a 10 per cent tax on long-term capital gains (LTCG) and a similar 10 per cent tax on dividend from these funds.

After these changes, make your future investment decisions based on the intrinsic merits of a product, rather than for the tax benefit.

Equities still good for the long term

The imposition of a 10 per cent tax on LTCG of equity funds is expected to dent investors' sentiment in the short term, as everyone loves tax-free options. But equities' long-term prospects remain intact.

For investors looking to grow their capital over long periods of time, equities remain the most efficient asset class as they offer higher growth and at still lower tax rates vis-a-vis other asset classes."

The tax on LTCG will only cause a marginal dent in returns. An investor who invested Rs 1,000 per month in the systematic investment plan (SIP) of a large-cap fund for 15 years would put in Rs 180,000.

His corpus would grow to Rs 608,085 (using the category average return) by the end of 2017, a growth of 3.38 times.

Hypothetically, if LTCG tax existed, his return would diminish to 3.15 times. "Despite the tax, equity mutual funds would still retain their position as the best asset class for the long run,

Long-term returns from the multi-cap (CAGR return of 11.28 per cent over past 10 years) and mid-cap categories (13.90 per cent) tend to be even higher than from large-cap funds (9.35 per cent).

Under no circumstance should investors quit their equity funds in a knee-jerk reaction to this news.

Instead they need to recalibrate their plans.

LTCG tax on equity funds will now be 10 per cent, while on debt funds it continues to be 20 per cent with indexation.

Due to the indexation benefit, the effective tax rate on bond funds held for the long term could be lower than on equity funds.

After the Budget investors should avoid choosing an asset class based on tax considerations.

Take into account your time horizon, risk profile, diversification needs and goals to arrive at an appropriate asset allocation.