With indexation benefit being removed from investment in debt and other non-equity schemes, these schemes have, arguably, become slightly less lucrative for retail investors.
Now any debt scheme purchased after April 1, 2023 will be taxed as short term capital gain even when the units are sold three years after the purchase. This means these investments will not be subject to indexation benefit like earlier.
So, should investors pause their systematic investment plans (SIPs) in these schemes or should they maintain the status quo? We explore this here after examining a slew of nuances.
Although lower tax is certainly one of the key incentives for deciding to invest in one category of mutual fund, it should not be the sole criterion, advise wealth experts.
They emphasise on the need to stick to long term financial goals and to maintain a well-rounded portfolio to make that happen.
There are a total of 315 schemes in the category of debt funds with a total assets under management (AUMs) of ₹11.81 lakh crore as on March 31, 2023. Also, there are 12 Gold ETFs with a total AUMs of ₹22,736 crore, shows the latest AMFI (Association of Mutual Funds in India) data.
And most retail investors opt for the SIP route for investing in mutual funds. This is the reason for spike in SIPs across categories.
The latest data shows that the total amount collected through SIP during March 2023 was highest ever at ₹14,276 crore and the number of mutual fund SIP accounts stood at a whopping 6.36 crore.
For a diverse portfolio
Investment advisors often point out that investing in debt and non-equity schemes is still recommended regardless of the indexation benefits to ensure a well-rounded portfolio. Placing huge bets on equity is quite a risky proposition for retail investors.
Sridharan Sundaram, a Sebi-registered investment advisor (RIA) and founder of Wealth Ladder Direct, says the investment in debt instruments continues to be lucrative despite the phasing out of indexation benefits in the current fiscal.
“We often tell our clients to maintain a balanced portfolio. There should be a healthy allocation to equity, fixed income instruments and gold. And halting one category of investment only because it is not tax-friendly any more is not advisable,” says Sridharan.
Renu Maheshwari, a Sebi-registered investment advisor, and CEO of Finscholarz Wealth Managers holds similar views as she says, “Tax laws keep changing and accordingly, investment plan should not change. Some fine tuning is needed for selections that were made only because of tax incentives. Tax incentives are a small part of their product characteristics.”
Some experts, however, opine that investors can opt for other higher yielding instruments such as fixed deposits (FDs) instead of debt funds.
“After the indexation benefit removal on long-term holding for debt mutual funds and gold funds, investors are better off deploying their investable surpluses in higher yielding bank or corporate FDs where they get opportunity to lock rates for longer period of time with more certainty,” says Gaurav Rastogi, founder and CEO, Kuvera.in.
However, investors who want to prioritise liquidity are advised to opt for debt mutual funds even after the change in tax provisions.
“Those investors that are looking to park their funds temporarily or easy liquidity can continue to with their SIPs in debt funds,” adds Mr Rastogi.
And instead of gold funds, he recommends investors to invest in sovereign gold bonds.
“SGBs fare much better for the common investor as they are easily available in secondary market over exchange, offer tax exemption on capital gains, have no expense ratio and also give a 2.5 percent coupon per year,” he says.