Clean up your mutual fund portfolio before March 31st 2018!

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:

Minimalist Portfolio Ideas for Young Earners

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?

If you can learn how to identify non-performers and how to review fund performance, yes you can do so asap.

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9 thoughts on “Clean up your mutual fund portfolio before March 31st 2018!

  1. Sir, For my investments that do not attract a short term capital gain tax, and any other exit fee’s, I plan to sell as part of spring cleaning / rebalancing towards a minimalist portfolio.

    Irrespective of the amount I understand that the transactions would not attract LTGC just because it was redeemed before March 31 2018 but I would need to report all such transactions as exempt income in my IT returns of 2017-18 due in June 2018. . Did I understand correctly ? Thank you so much for clarifying.

    Thanks again,

  2. In fact I was waiting for SEBI reclassification implementation before this LTCG fiasco came in to picture. i am not sure when MF houses will make reclassify announcements. Two birds at one shot re-balancing is my plan.

  3. Two queries: 1. Can an under-performing direct scheme that has only LTCG before Mar 2018 be switched to another good scheme within an AMC instead of redeeming and re-investing?
    2. One year after April 2018, if two different direct schemes that are eligible for tax-free LTCG of 1 lakh, redeemed from different AMCs (amounting to redeeming of 2 lakhs as tax-free), how the same will be reported if these are liable for TDS by different AMCs. Is this a loophole?

  4. 1. If I’m not wrong, a switch is the same a redeeming and reinvesting. So, when you switch to another fund with the same AMC, you’re actually doing a redeem and reinvest. LTCG rules apply for a switch.
    2. PAN 🙂

  5. Dear Pattu,
    Need your immediate help in above regard.

    Very first How and where to get figure for LTCG ( considering grandfather values). Whatever the VR is showing as LTCG and STCG can be taken as final amount for LTCG/LTCG?

    . If My LTCG comes above 10L as i am investing since last 7 to 8 yr, How to do above procedure to reduce taxation liability ? Also if our XIRR is above 15 , Do we still need to redeem? Will it be beneficial? for me 80 % are above 15

    If only non performers ( for me one or two ) redeem, It will be 4 to 5 L as LTCG. What are options left with Non Resident to save maximum on this from taxation?

    Can i invest redeem amount for Tax Rebate MF to reduce tax liability?

    Sorry if my queries sound too low but currently big fuss for me.


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