A Tax In Time Saves You Dime

Taxes aren’t always bad for your investments. Here’s when you shouldn’t avoid them

- ASHUTOSH GUPTA

Tax is arguably the most dreaded word in the world of savings and investments.

Actually, inflation is the more damaging one, but most investors remain oblivious to its impact. So on the fear quotient, taxes are clearly the more intimidating one.

And that’s not without reason. They are one hell of a beast. They make good returns look bad, taking a good measure of your earnings away. In extreme cases, they make people do unlawful things to evade them, but let’s not go there.

For long-term investors, what’s particularly hurtful is that taxes keep chipping away at your returns even when you only intend to fine-tune your investments (re-balancing, for example) while staying invested.

Therefore, being tax conscious is the duty of every sensible investor. While you can’t wish them away, it’s appropriate to use every legitimate trick to avoid them from becoming a wrecking ball to your finances.

Having said that, it becomes problematic when you make tax avoidance the end goal itself, which, in turn, starts driving your investment decision-making.

Recently, we saw that happening when the government announced the withdrawal of indexation benefit from certain types of funds, triggering a mad rush to invest in them before the new tax rules kicked in. Much has already been written about it, including by us, so I’d rather spare you the details.

Instead, I’ll talk about a tangential issue where I see tax-related inhibitions leading investors to suspend rational investment actions. One of them is the issue of switching from regular to direct mutual funds.