A month has already passed in 2019. Still have no plans regarding your investment journey this year? What is this year going to bring if you decide to invest or are already investing? Markets can be unpredictable but you can start this year better off by having a few investment strategies. These moves can help you grow your wealth this year. Read on to find out these steps.
1. Harvest capital gains from equity mutual funds:
Small investor’s appetite has not depressed after the reintroduction of the tax on long-term capital gains from stocks and equity funds. In 2018, the monthly SIP inflows into mutual funds rose 20%. The reason for this rise? Investors realized that the potential gains from equity funds could be higher than the 10% tax on gains beyond Rs. 1 lakh. Small investors with SIPs of 5000-10000 may not come under the tax exemption immediately. But on the other hand, bigger investors with monthly investments of Rs.40,000-50,000 will most probably get affected. If you invest Rs.35,000 per month in an equity fund, within two years even 14% annualized returns will lead to taxable capital gains. Harvesting capital gains regularly to prevent gains from building up is what you as an investor can do. So, start redeeming units after your SIPs complete a year of investing and reinvest the proceeds in the same or a different fund. Keep doing this as more of your SIPs complete one year.
2. Go for short-term debt funds:
In 2019, as an investor, you should stay away from long-term debt funds given the uncertainty on interest rates movement. It will be safer to opt for short-term debt funds.
Since debt funds carry interest rate risks, go for fixed maturity plans (FMPs) if you are not comfortable with risks. Once FMPs are held for more than three years, the gains are taxed at a lower rate of 20% after indexation as the gains are treated as long-term capital gains. If held across more than three financial years, the indexation benefit is enhanced. You will get four years indexation as some FMPs available right now will mature in 2022-23.
3. SIPs to benefit from volatility:
During the elections, stock prices may fluctuate within a narrow band and then later move sharply in either direction depending on the poll outcome. Do not stop your equity SIPs during this period of high volatility. This volatility might actually help you benefit from rupee-cost averaging. Rupee cost averaging is where you will be able to buy more fund units when they cost less and fewer units when fund NAVs rise. Thus, you are likely to miss this opportunity to accumulate fund units at a low cost if you stop your SIPs during this period. But if you stop your SIPs and restart after the period of volatility, the market may already go up.
If you are someone who started SIPs in the past 12-18 months, it is critical for you to stay invested. This is because SIPs work best during volatility. During the middle or beginning stages of your SIPs, you should actually welcome volatility.
4. Invest in the name of a senior citizen parent:
An additional exemption of Rs.50,000 for interest income was given to senior citizens through the 2018 budget. You can gift your parents money if they are not in a very high-income tax slab. Get them to invest in small savings schemes or fixed deposits. The main advantage is the higher interest rates offered to senior citizens by almost all banks. One can invest up to Rs.6.25 lakh to earn 50,000 tax-free from this strategy assuming an interest rate of 8%. Gifts to parents and investments in parents’ name will not be subject to clubbing unlike gifts and investments made in the name of a spouse. Also, on the money that you give to your parents, there is no gift tax. So you can make use of their basic tax exemption limit. If they are above 60 it is 3 lakh and 5 lakh if they are above 80 years of age. In case the exemption limit exceeds you can help them save taxes. The way out is by investing in a scheme that is eligible for deduction under Section 80C.
Also read: ELSS, the tax saving mode that makes sense
5. Consider NPS:
By extending the tax exemption to the entire 60% of the corpus that can be withdrawn at maturity, the government has removed a major hurdle from the National Pension Scheme (NPS).
Investors can now allocate up to 75% to equities. Till the age of 70, they can stagger withdrawals and stay invested. Furthermore, NPS fund managers can invest in a larger universe of stocks. All NPS funds have given double-digit returns in the past 5 years. NPS can also help reduce taxes significantly.
Thus, if you have not yet decided on your investment strategy for this year, we hope you find these tips useful. To start your investment journey or get help with your existing investments, consult a financial planner now.