Every dark cloud has a silver lining. The Equity LTCG tax and the dividend distribution tax on equity mutual funds from April 1st, 2018 is the perfect stimulus to clean up our mutual fund portfolios. Here is how to do it.
1: Update your portfolio. Have all your mutual fund holdings in one place. Not applicable to those who slow down the Value Research server every day from 8:10 – 10:30 pm checking for the day’s gains and losses and wonderful insights from those.
2: Sort funds by investment style; market cap and sector allocation
Value Research or preferably Morningstar would tell you more about the investment styles of each equity fund that you hold. Does it chase after growth stocks or value stocks, or both? What kind of sectors does it tend to invest in? Does it invest more in large caps or mid-caps etc. You may need to look at the monthly portfolios as well to get a pattern.
Once you get this information, make a table.
3: Identify funds that you think (as on date) are “keepers”
From the above table, spot one large-cap fund (or two if you have a huge portfolio) and one/two mid-cap funds. Or, if you prefer balanced funds like me, pick one or two of those. These are your keepers. These are funds you believe that will deliver for your goal in mind with good downside protection. Want some ideas:
4: Decide on an asset allocation within equity
Are you going to go with a 60% large cap + rest mid-small cap portfolio? Or do you prefer 60% balanced + rest mid-cap + 10-15% international stocks. Or would you prefer more uniform allocation to sectors (easier said than done!) There are many ways to do this. Pick one!
5: Redeem from the rest and reinvest in the keepers.
Redeem at least units that qualify for LTCG. These would be tax-free if you redeem before March 31st. You will need to report this as exempt income in ITR for FY 2017-208 (AY 2018-19). then reinvest them in your keepers as per the above asset allocation. Do so merciless. You will feel lighter at the end of it.
Sure, sure you can always do this in the new financial year by redeeming such that LTCG <1 lakh. That is like saying, “I will clean up after some dust gathers”. Use the budget proposal as an excuse, as a catalyst to clean up clutter and build a diversified portfolio.
Just to clarify: I am not asking you to clean up because of math or some tax benefit. I am suggesting that you prepare for the future as soon as possible.
Why? At some point in time, you will need to rebalance your portfolio, get rid of non-performers and so on. If you have a clean portfolio, you can do so with so much more clarity. Of course, the tax calculation also becomes simpler.
6: How about non-performers?
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