Smart money moves for 2019

The year 2018 was very eventful. Benchmark equity indices touched an all-time high but closed the year with insipid returns. While the Sensex gave 5.90% returns, broader indices did worse. Most asset classes generated below average returns due to extraordinary global and domestic developments.

We don’t expect 2019 to be any different. While analysts contend that the equity markets will do well after the poor show in the previous year, the general elections can change everything. Global economic and geo-political developments could have a big impact on the equity markets. Also, there is uncertainty about how interest rates will move.

What should be your strategy in the new year? We have listed five smart moves that can help you make money and grow your wealth in 2019. We hope you will find them useful.


SIPs can help you ride heightened volatility in the election year

Stock prices may fluctuate within a narrow band in the run up to the elections, and may later move sharply in either direction depending on the poll outcome. During this period of heightened volatility, don’t stop your equity SIPs. In fact, the turbulence might actually help you in rupee-cost averaging—buying more fund units when they cost less and less units when fund NAVs rise. So, if you stop your SIPs during this period, you are likely to miss the opportunity to accumulate fund units at low cost, and by the time you restart SIPs, the market may already have run up.

Staying invested is particularly critical for investors who have started SIPs in the past 12-18 months. “It is during volatile periods that SIPs work best. Investors should actually welcome volatility during the beginning or middle stages of their SIPs,” says Amol Joshi, Founder, PlanRupee Investment Services. As the table shows, historically, inve stors have gained by continuing SIPs through lean market phases and sticking around for longer terms.


Regular churning will keep gains below the ₹1 lakh threshold

The reintroduction of tax on long-term capital gains from stocks and equity funds has not depressed the small investor’s appetite. Monthly SIP inflows into mutual funds rose 20% in 2018 as investors realised that the potential gains from equity funds could be higher than the 10% tax on gains beyond ₹1 lakh. In fact, small investors with SIPs of ₹5,000-10,000 may not come under the ambit of the tax immediately. However, bigger investors with monthly investments of ₹30,000-50,000 could get affected. If you invest ₹30,000 per month in an equity fund, even 12% annualised returns will lead to taxable capital gains within two years.

Investors should consider harvesting their capital gains regularly to prevent gains from building up. If you started SIPs about a year ago, start redeeming units after they complete a year and reinvest the proceeds in the same or different fund. Similarly, keep doing this as and when more SIPs complete one year.

This will reset the buying price of the units and ensure that your capital gains do not overshoot the ₹1 lakh threshold anytime soon. There is no transaction cost because mutual funds don’t have entry loads.


Interest up to ₹50,000 a year is tax free for those above 60

The 2018 budget had given senior citizens an additional exemption of ₹50,000 for interest income. If your parents are not in a very high income tax slab, you can gift money to them and get them to invest in small savings schemes or fixed deposits. The cherry on this cake is the higher interest rates offered to senior citizens by almost all banks. Assuming an interest rate of 8%, one can invest up to ₹6.25 lakh to earn ₹50,000 tax free from this strategy.

Unlike gifts and investments made in the name of a spouse, gifts to parents and investments in their name will not be subject to clubbing. “This is perfectly legal and will not be treated as a sham transaction,” assures Sudhir Kaushik, chartered accountant and co-founder of tax filing portal Taxspanner.

Also, there is no gift tax on the money you give to your parents. So make use of their basic tax exemption limit—₹3 lakh for people above 60 and ₹5 lakh if they are above 80 years of age. In case, they exceed the exemption limit, help them save taxes by investing in a scheme that is eligible for deduction under Section 80C.

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The scheme became more attractive in 2018

The government has removed a major thorn from the NPS by extending tax exemption to the entire 60% of the corpus that can be withdrawn at maturity.

Also, investors can now allocate up to 75% to equities. They can also remain invested till the age of 70 and stagger withdrawals. What’s more, NPS fund managers don’t have to mimic the Nifty and can invest in a larger universe of stocks. All NPS funds have given double-digit returns in the past five years (
see table).

“NPS can help reduce tax significantly. Taxpayers should ask their employers to start the scheme,” says Archit Gupta, CEO, Cleartax.


Uncertainity makes long-term debt funds risky

Given the uncertanity on interest rates movement, investors should stay away from long-term debt funds in 2019. Short-term debt funds will be a safer bet. “Investors should gradually move away from long-term debt funds as they currently don’t offer enough compensation to take on the incremental risk,” Dhawal Dalal, CIO, Fixed Income, Edelweiss Mutual Fund.

Debt funds carry interest rate risk. If you are not comfortable with this risk, go for fixed maturity plans (FMPs). If held for more than three years, the gains are treated as long-term capital gains and taxed at a lower rate of 20% after indexation. The indexation benefit is enhanced if held across more than three financial years. Some FMPs available right now will mature in 2022-23, so you will get four years indexation.

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