One of the most cherished benefits of debt fund investors is set to go from the next financial year i.e. April 1, 2023. With only few days left now, asset management companies (AMCs) have started accepting lumpsum contributions to their international funds. They are even reaching out to investors and asking them to use the window available till March 31, 2023, to claim indexation and long-term capital gain (LTCG) benefits.
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While investors may be willing to take the plunge, does it actually makes sense to invest just to claim the taxation benefits?
Let's decode the scenario first
From April 1, 2023, profits from mutual funds where not more than 35 percent is invested in equity shares of Indian companies will be deemed to be short-term capital gains. Also, debt funds held for more than three years will no longer enjoy indexation benefits. Additionally, they won't be eligible for a 20 percent tax rate.
This comes as a setback for investors as they saw debt funds as highly sought after investments due to their tax benefits. After the Finance Bill 2023 amendments, it is expected that the attractiveness of these products will diminish. As a result, there has been a sudden influx of investors putting money into debt funds.
In a conversation with CNBC-TV18, Nishant Agarwal, Senior Managing Partner and Head, Investment Advisory at ASK Private Wealth, said, "We have seen a deluge of investors who are looking to invest in debt funds in the next 1-3 months are preponing their investment till March 31, so that they can take this preferential tax regime by investing in the next three-four days."
But, how right is the approach?
It's important to be tactical here.
Any investment rule clearly says that stashing away money in any instrument just for the sake of saving tax is not the proper approach. It's always advisable to link tax-saving instruments with one's goal, which can otherwise cost a lot in the future.
What should be the way out?
Experts ask people to invest in products that will help in achieving long-term financial goals, while assessing the risk taking ability. The same applies to this scenario too.
"Investors should use the window till March 31, 2023 but tactically allocate to various debt funds, including target maturity funds and other long-term fixed income funds with modified duration of more than 6-7 years at least. Example could be ICICI Long Term Income or Nippon Nivesh Lakshyawith. The idea is to have a skew towards long duration schemes," Girish Lathkar, Partner Private Wealth at Upwisery Capital Advisors LLP, told CNBC-TV18.com.
According to HDFC Securities, the top picks across banking, financial services and insurance sectors are ICICI Bank, State Bank of India (SBI) and Cholamandalam.
ASK Private Wealth's Agarwal further advised investors to maintain a neutral asset allocation, spreading their investments across debt, equities, and global markets.
"This balanced approach can help minimise risk while still allowing for potential growth. Currently, we are maintaining a neutral asset allocation between equity, debt and global,” he said.
To conclude, one should invest but not select funds blindly especially in the current high interest rate scenario. High interest rates may attract more investors to the newer debt funds that pay higher interest. As a result older debt funds with lower interest rates may become less attractive.
(Edited by : Shoma Bhattacharjee)
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