After LTCG Tax On Equity Share & Mutual Funds, Will Ulips Gain Attention?   Feb 09, 2018

S&P BSE Sensex* Re/US $ Gold Rs/10g Crude ($/barrel) FD Rates (1-Yr)
34,005.76 |-1060.99

64.26 |-0.28

29,855 | -445.00

65.48 |-4.17

5.0% - 6.75%
Weekly changes as onFebruary 08, 2018
BSE Sensex value as on February 09, 2018

In your childhood, did you ever play with kids older than you by atleast 5 years? What’s been your experience? You might have often found yourself on the wrong side of the play. Biggies always dominate, don’t they?

The situation of mutual funds is no different today. They find themselves in a disadvantageous position.

In the game of garnering more Assets Under Management (AUM); big-bros—insurance companies have always had an edge over them. Despite that, mutual funds of late gave them tough competition. Historically, majority of Indian investors didn’t look beyond fixed deposits and insurance policies, as far as investing in financial assets is concerned. Mutual funds gained popularity over last 3-4 years. The success of mutual funds largely attributes to the various investment education initiatives that promoted equity investing through SIPs (Systematic Investment Plans). Nonetheless, tax exemptions on the Long term Capital Gains (LTCG) was also an incentive for investors.

 After years’ of stagnation the market moved up substantially over a last few years, and returns from other asset classes failed to enthuse investors. As a result of these two factors, inflows in mutual funds have remained robust.

It seems things are likely to change, at least in the short term.

The government is eying additional revenue of Rs 20,000 crore from the LTCG tax on equity. As per some experts, the newly imposed tax is likely to affect mutual fund inflows to an extent. Along with LTCG on equity, dividends distributed by the equity oriented mutual fund schemes will also attract the Dividend Distribution Tax (DDT). This move will surely eat into investors’ returns. 

Big-bros of mutual funds are blue-eyed boys of the government. The public sector insurance giant, Life Insurance Corporation (LIC) of India, seems to have put all its weight behind the insurance lobby to convince the government to exempt LTCGs made on Unit Linked Insurance Plans (ULIPs).

As a result of this biased tax treatment to LTCG arising on ULIPs, mutual funds are expected to lose out some business to insurance counterparts.

Is it in the true spirit of the game to give one industry a step-child treatment?

Thus, nobody may openly oppose the move—to sound ‘professional’—but many mutual fund industry players believe, it’s a mistimed and a biased move.

ULIPs historically have been a grossly missold product that at least in the initial phase of growth levied heavy charges to compensate their agents and distributors. As compared to diversified open-ended mutual funds, ULIPs are inflexible—i.e. if you are stuck with a wrong plan, you can’t easily exit.

Despite all these disadvantages, big-bros have always received disproportionate favours from the government. It’s no different even this time.

Is it mere a coincident that LIC has bailed out government’s disinvestment programmes on numerous occasions? Perhaps, the favourable tax policies to ULIPs will further encourage investors to deviate from mutual funds and invest in ULIPs. More bailouts!

The government aims to raise around Rs 80,000 crore through disinvestments in FY 2018-19.

In that case, keeping ULIPs out of the purview of tax is a win-win situation for the insurance players and the government. The latter will still collect the incremental tax yet may be able to accomplish disinvestment objectives; and the insurance companies will naturally garner more business.

Big-bros seem to have lobbied strongly and mutual funds are still treated like ‘limbu-timbus’ of the industry. 

But not all’s lost for the mutual funds—good products remain good irrespective of the favourable tax treatment. And flawed products remain flawed, again, irrespective of the tax treatment.

Choice is yours, investors!

Whether to look at favourable tax-treatment and get stuck with bad products or try to identify products that can still generate comparatively higher tax-adjusted returns?

Yes, you need insurance, but there’s no compulsion to bundle it with investments and buy ULIPs. Buying a term plan is the best way to safeguard your dependents from the risk of eventualities.

For growing long term wealth, you should consider equity oriented mutual funds as an option.

The newly imposed LTCG tax is not only incentivising trading, it’s also creating a breeding ground for poorly designed products. 

Is government turning a deaf ear to the real issue? Looks like…

Perhaps shoring up revenues and protecting the interest of biggies (to protect its own) seems to be the priority.

Editor's note:

Are you confused with the present market conditions?

Will the market go up or down from here?

Should you invest at all? If yes, how?

Which mutual fund schemes to invest?

If such questions are lingering in your mind, subscribe to PersonalFN’s latest exclusive report: Top 5 Equity Funds To Invest In 2018.

This exclusive report has been created keeping the Investment Scenario IN 2018 in mind.

If you have a question, “Which equity funds to invest in now ––under the current market conditions?” This report is the answer to your question. Subscribe now!


Best Midcap Funds For 2018. Look Before You Leap!

Should You Opt For Dividend Option Offered By Equity Funds Now


Though the event of this year’s Union Budget 2018 is over, its adverse impact is still being felt on Dalal Street. Thanks to the 10% tax on Long Term Capital Gains (LTCG) arising out of sale of equity investments and 10% Dividend Distribution Tax (DDT) on dividend declared by equity-oriented mutual fund schemes  ––both of which have been a double-whammy.

The DDT on equity mutual funds brings dividend and growth plans of mutual funds on par with each other.

Until now, the dividends paid under equity schemes——those investing more than 65% of their assets in equity shares and other related instruments——were tax-free.

To read more and know Personal FN’s views, please click here.

Know Here How Much More Tax Will You Pay Due To Higher Cess …


Disappointment about lesser entitlements in the Budget 2018-19 is spreading like viral fever among middle-income groups.

Citizens earning a salary had high hopes from the Finance Minister, but their aspirations were dashed completely. The government has reintroduced the standard deduction of Rs 40,000.

However, this doesn’t provide much relief to salaried people as deductions such as transport allowance and the reimbursement of miscellaneous medical expenses would be discontinued.

Cesses—taxes collected over and above normal taxes to fulfil specific objectives—are going up incessantly. And the list of tax deductions and exemptions has remained more or less static. In Budget 2018-19, the government has proposed to replace the existing 3% education cess with 4% education and healthcare cess.  This move is expected to fetch additional revenue of Rs 11,000 crore.

Fund allocation to education and healthcare…
  Budget Estimates (Rs in crore)
Ministry 2016-17 2017-18 2018-19
Department of School Education and Literacy 42,889 46,356 50,000
Department of Higher Education 29,026 33,330 35,010
Department of Health and Family Welfare 37,671 47,353 52,800
Department of Health research 1,324 1,500 1,800
(Source: Budget 2018-19)

Since a cess is collected as a tax on tax, the impact of 1% hike may not make much a difference to individual taxpayers.  Depending on the tax slab you fall under, your tax liability is likely to increase by an amount ranging from Rs 100 to Rs 2,600. This budget has left tax slabs and tax rates unchanged.

To read more and know Personal FN’s views, please click here.

What Should Mutual Fund Investors Do After LTCG Tax Norms


The Union Budget 2018-19 might have been a shocker to stock investors and equity mutual fund investors.

The deepest fears of Indian investors came to life when Finance Minister Arun Jaitely announced the proposal to levy a 10% tax on long-term capital gains arising out of sale of listed equity shares and mutual fund units.

The proposal certainly did not go down well with investors as seen in the sell-off on Friday, February 2, 2018. The S&P BSE Sensex tanked by 840 points or nearly 2.50% to 35,067. The S&P BSE SmallCap extended the losses further by nearly 5%, while the S&P BSE MidCap Index dropped about 4%.

Retail investors, who over the past couple of years were opening up to the equity market, are wondering how to approach mutual fund investments in the present conditions.

Over the past few years, fund houses and their distributors have aggressively pushed balanced funds luring investors to the dividend option, given the tax-free status at the time. Not surprising, the corpus of balanced funds have burgeoned out of size. Assets managed by balanced funds grew nearly 8 times to Rs 1.35 lakh crore from 0.17 lakh crore over the past five years as on September 2017.

Now, dividends too, will be taxed at a rate of 10%.

Can the policy makers imagine the investors’ plight?

Investors, like you, who have religiously putting aside money for their long-term goals expecting tax-free returns, will suddenly have to bear the brunt of parting away with 10% of those gains to the government.

Senior citizens who have invested in the dividend plan of equity-oriented mutual funds to create a steady flow of tax-free income will now earn a 10% lower income.

This is yet another disruption for mutual fund investors, after the same government modified the LTCG tax rules for non-equity schemes.

In the Union Budget 2014-15, when the BJP government came to power, the holding period for non-equity mutual fund investments to qualify as long-term capital gains was increased to three years from one year. Along with this, the tax rate of 10% without indexation was withdrawn. Thus, the LTCG tax remained 20% with indexation.

Post-implementation, Fixed Maturity Plans (FMPs) of debt mutual funds went out of flavour. As did Monthly Income Plans (MIPs) and other hybrid debt-oriented schemes.

To retain investors, fund houses began promoting equity-oriented schemes such as Arbitrage Funds and Equity Savings Funds as a low risk investment option, which enjoyed a tax-free status after a holding period of one year.

As the investors’ interest grew towards equity, the dividend plans of balanced funds too were aggressively promoted as an option to earn a steady flow of monthly income.

Now four years later, Budget 2018 will create another disruption.

Before you invest in an equity mutual fund scheme, you will need to take in to account the tax implications.

How does the new LTCG tax norms impact your returns in equity oriented funds?

PersonalFN takes a look…

Longer the holding period, the better

Open-ended equity diversified funds have been able to generate returns of about 12% to 14% compounded over the long term of 5-7 years or more. Investors who have enjoyed these double-digit gains will now have to part 10% of it to the government.

Let’s assume you invest Rs 2 lakh in an equity mutual fund now. Over the next five years, the fund generates a return of 12% compounded. This translates into a gain of Rs 1.53 lakh, if you redeem it at the end of the 5-year period. The 10% tax will lead to a deduction of Rs 15,247. Post-tax, your return will work out to 11%.

Now let’s say you invest Rs 2 lakh in another mutual fund that return 12% CAGR in one year. The gains will work out to Rs 24,000. The post-tax return is 10.80%.

But if you are/have invested for as many as 10 years, and the mutual delivers the same return of 12% CAGR. The post-tax returns work out to 11.22%.

To read more and know Personal FN’s views, please click here.


SBI Bluechip Fund: Is It Robust Enough?

The S&P BSE Sensex crashed over 800 points in a day, post budget, and another 900 points in the first two trading session this week, losing atleast 5% of investor’s wealth. Such a fall is usual for a mid and small cap index, but seeing the larger market index collapsing like a house of cards is actually a nail biting event for any equity investor.

Large cap funds are considered to add the stabilizing factor in one’s equity mutual funds portfolio. But can you rely on them indeed, after such a crash? Well, you can, only if you have studied them well.

Let us have a look at one of the blue-eyed boys in the large cap funds category – The SBI Bluechip Fund. SBI Bluechip is one such large cap fund in the stable of SBI Mutual Fund. It aims to invest in stocks of bluechip companies, suitable for long term capital growth. Bluechip companies are typically large businesses, with substantial market share & leadership in their respective industries. They historically have shown successful growth, high visibility and reach, good credit ratings and greater brand equity amongst the public. Investing in such companies brings relative consistency to a portfolio.

Click here to read the complete note!

And Other News...

It’s amusing! While on one hand, the government seems to be concerned with increasing inflows into mutual funds, But on the other, it’s allowing mutual funds to incentivise distributors by collecting higher expense ratio from the investors. Securities and Exchange Board of India (SEBI) allowed mutual funds to collect additional charges upto 30basis points for distributing their products beyond top-30 cities. A basis point is a hundredth of a percent.

Financial Terms. Simplified.

Budget Deficit: A budget deficit occurs when expenditures exceed revenue, and it is an indicator of financial health. The term is typically used to refer to government spending rather than business or individual spending. When referring to accrued government deficits, the deficits form the national debt.

All You Need To Know About Retirement Planning

Quote: "Bulls don't read. Bears read financial history. As markets fall to bits, the bears dust off the Dutch tulip mania of 1637, the Banque Royale of 1719-20, the railway speculation of the 1840s, the great crash of 1929."‒James Buchan

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