A Higher Price For Mutual Fund Mistakes

After April 2018, equity fund investors are paying an even higher price for making the wrong choices. Here’s how to avoid that.

- Dhirendra Kumar

Since the Union Budget 2018, all of us who invest in equity mutual funds are now paying a much higher price for choosing the wrong funds. I suppose most of you would have recognized that date as the beginning of the (re)imposition of long-term capital gains tax on equity funds. What investors don’t often realize is that the 10 per cent tax that the government charges is just the root cause of your problems. The real problem is far greater.

Earlier, realizing that a fund you had invested in and then switching to a better one was basically cost-free, as long as at least a year had passed. You earned a little less and then sold off and every rupee could be shifted on to the next fund. Now, when you shift, 10 per cent (plus any surcharge) of your gains have to be paid as tax.

Over the course of a 10–15-year investment, if you end up shifting your money three or four times, you lose 10 per cent of your gains every single time. But that’s not the only impact. The money that you pay off as tax does not get added to the next investment and does not grow. That means that the final impact of the simple 10 per cent tax is far greater. Depending on how you switch funds, it could double that or even more.

Moreover, because of the way this missed opportunity actually hits you, most of the time you will not have any idea of exactly how much the hit was. It requires a complex calculation that combines multiple tax payouts and a separate stream of compounding opportunity costs. Almost always, an investor would just see each event as a separate hit of a nominal 10 per cent.