Use this “market crash” to clean up your equity fund portfolio tax free!

Here is how you can use this “market crash” to clean up your equity fund portfolio tax-free! Have you always wanted to switch from regular plans to direct plans? Always wanted to reduce the number of funds in your portfolio? Wanted to switch to index funds after ahem reading a certain blog? Then here is your chance to clean up free from long-term capital gains tax.

Here is how you can use this "market crash" to clean up your equity fund portfolio tax free!
photo by Kylir Horton

Well, it is not much of a crash, not yet anyway, but every cloud has a silver lining and this is a great opportunity to get rid of mutual funds that you have been holding without further investments for a while now and/or get rid of units older than one year from regular funds or fund that you do not care about anymore.

How to use this “market crash” to clean up your equity fund portfolio tax-free!

  1. Go the Value Research and locate your fund’s page
  2. Click on the performance tab  and scroll down to the “trailing return” chart
  3. On the top right, you will see the dates. Set the “from” date to Jan 31st 2018 and leave the “to” data as is.
  4. Check if you fund’s current NAV is lower than that on Jan 31st 2018. That is a negative absolute return between Jan 31st 2018 to say, 5th Oct 2018 (you can also give it a couple of days to make sure the NAV is well below).
  5. If current NAV (say 5-10-2018) < NAV on 31st Jan 2018 then, all equity mutual fund units purchased before 5th Oct 2017 are free from long-term capital gains tax.
  6. Even if current NAV > Jan 31st 2018, you can still redeem, but you need to make sure the total long-term capital gains booked this financial year is less than or equal to one lakh. This may not be the case for those who have been investing for several years now. So the condition in step 5 is a lot more convenient.
  7. Note that, current NAV < NAV(31-01-2018), is not a real loss and you cannot use this offsetting other capital gains. Real capital gains loss is only when current NAV < NAV (purchase date)
  8. Note that point no 5 applies only to long-term capital gains. So you can now pull out units that are older than 1Y old for now and pull out the rest when you get another chance.

So here is a snapshot for Franklin Blue Chip India from Value research (I have added the annotation in blue)

Current NAV is higher than NAV on Jan 31st 2018 making long term capital gains tax free

Of course, you could have cleaned up your folio following the above logic between April 1st 2018 and Aug 16, 2018, too! Just pointing that you got another chance. Watch the following video to understand you can reduce the number of funds in your portfolio or reduce exposure to unnecessary funds tax-free.

Why your equity fund portfolio can be cleaned up tax-free!

Resources

# Check out more videos from the freefinal youtube channel

# You can find out how many units are eligible for LTCG using this  Equity LTCG Tax With Grandfathering Calculator (this post also has pictures from the above video that you look up for better understanding)

# Also, check these out:

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

Should I book profits each year to lower Equity LTCG Tax?

 

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6 thoughts on “Use this “market crash” to clean up your equity fund portfolio tax free!

  1. In Point no. 7
    Can we carry forward long term capital ‘ loss ‘ for next financial year( years?) ?
    If purchase nav 150 rupees August 2015.
    On 31 January 2018 nav 180 rupees ( grandfather).
    If I sell September 2018 at nav 170 rupees.

    True long term gain 20 rupees. After grandfather clause it’s long term loss of 10 rupees. As you pointed out that we can not use this loss for any gain offset. Can we carry forward for next years ?

      1. Thank you very much for help and clarification. Keep writing. Your writing helped me a lot. May God bless you. Take care . May youProgress in every aspect of life.

  2. If I want to clean up funds that are less than 12 months old. But current NAV is less than the NAV on 31 Jan. Will this attract STCG?

  3. Every cloud has a silver lining – can’t agree more.

    Here is a suggestion by author to clean up the portfolio by selling the non-performers and Regular ones.

But is it a good idea?! Consider the following reasons:

    Basic concept of investing is to buy when the market is low and sell when the market is high. The idea of selling when the market is low is in direct contradiction to this.

    Tax is less certain than death but more certain than sunrise, as they say. Yet taxation has to be de-coupled from investment philosophy. Who knows, there may be a favourable tax break in the coming Finance Bill!

    Best time to weed out non-performers is in a booming market, and not in a falling market. Why?! Because in a falling market non-performer would fall more than its peers and the pain of booking larger loss would stick. In a rising market, switching over to a better performer would alleviate the pain.

    If you are a long term/ SIP investor, you would consider that such occasional “crashes” are part of the game during a long run. No tree can grow up to the sky. A boom will be inevitably followed by a correction.

    There is no fundamental or technical or indication to suggest that market has stabilised out of the present “crash”. Fundamentals suggest volatility due to falling rupee, rising oil price, unsure Q2 & Q3 results and impending elections, throughout the coming months. Nothing credible can be drawn from the technicals at the moment.

    Instead of panic selling in a falling market, better idea would be to keep calm (This Too Will Pass Away!) and identify better performing MF’s in the category in the meantime (consistent performers with lower Downside Capture in this “crash”) and gradually switch over to direct funds once the market picks up its journey northwards. To spot its journey northwards, moving averages cross over and technical indicators could be of great help.

    1. And, most important, free yourself from the continuous thoughts about money. Meditate, do Yoga, take a stroll in the park, meet the frolic children and laugh with them. Touch the leaves and hug a tree and remind yourself that life is far greater than market and money. Your success in investments is in direct proportion to your ability to subordinate money!

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