Should I expect lower returns from equity in future?

The re-introduction of equity LTCG tax offers not only a chance to clean up our portfolios, but also recognise an important fact: returns from equity may gradually decrease in the next decade or so. No, I am not talking about tax eating away our returns. There are two reasons for this, – one positive and one not so much. We will consider the positive reason in this post.

Yes, the equity LTCG tax (assuming it stays at 10% for a few years) will reduce returns by at least 1% as shown in this study: Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1. So I will now expect 9% from equity (instead of 10%). As explained below, this also means fixed income returns will come down, to about 6-7% after LTCG tax. With that, let us get tax out of the way and consider some history. read more

Worried about 2% single day fall in indices? Be ready for more or leave!

On Feb 2nd the day after the budget, the Sensex fell by about 2%. If you this is a “big fall” or if you are worried, you only have two choices: get used to it and be ready for more or leave and head to fixed income. The following charts were published on Mar 11, 2015, after a similar 2% fall on Mar 9th, 2015. Nothing has changed!

Looking at investor reactions, I am now confident that if there is a sustained fall, most of them will not add more to equity. Good. Only the fittest survive. read more

Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1

It was announced in Budget 2018-2019: Long Term Capital Gains from Equity to be taxed at 10%.  Here is an illustration of how much long-term capital gains tax you need to pay on a long-term systematic investment in equity or equity mutual funds. This is part one where the LTCG tax after each year of investment is shown. In part two I shall consider the benefit (if any) of booking one lakh profits each year to get a better base price when be finally redeem. read more

Why you should not worry when the stock market hits an all-time high

Each time the markets move up for a few sessions, it makes many investors uncomfortable. Is it a bubble? Is it euphoria? They wonder and if the movement results in an all-time time, the worry machines are turning in full swing. In this post, I discuss some reasons for this investor behaviour and how one can stop worrying about market movements by focussing on more important aspects.

Worry and fear are unproductive because often people worry and fear when they do not know what to do. This perfectly applies to investing and portfolio management. If you hang around in a personal finance forum, you can see a pattern in the questions. Just consider the questions people ask or the remarks they pass when the market hits an all-time high. read more

Sensex Charts 35 year returns analysis – stock market returns vs risk distribution

How much return can I expect from the stock market? What is long-term in the stock market? What is the risk associated with the stock market? Regular readers may be aware that I have discussed these questions with returns and risk spreads from time to time. In my most comprehensive analysis, Sensex return charts for the last 35 years along with the return distributions are presented. These provide a visual representation of stock market risk. read more