Is ‘tax loss harvesting’ worth it?
There are many times when we experience a notional capital loss in the stock markets. This form of loss is the simplest but painful because it gives a feeling of losing something. You decide to end the pain if there seems to be no end in sight and sell it at some point to book the losses.
What is tax loss harvesting?
If you hold stocks or equity mutual funds in your portfolio that have unrealized losses and you feel you should book the losses to look ahead, you can set off these losses against realised profits on which you have to pay tax in that financial year. To do this, you have to book the losses to effectively reduce the realised gains and hence also reduce the tax payable. This strategy is called ‘Tax Loss Harvesting’.
Should you use tax loss harvesting with your investments?
For investors who have a large equity portfolio and higher incremental gains, tax loss harvesting can be an effective strategy provided the stocks or equity MFs which are in a loss right now seem destined to stay down for a very long time in your opinion. Please don’t get out of good stocks or equity MFs just because there is a seasonal downtrend in the markets – if you get into that tendency just for saving a bit of tax, you will never be able to build long-term wealth.
Important points to note
Please remember that Long-term capital losses can be set-off against only long-term capital gains. You cannot set-off long-term capital losses against short-term capital gains. However, Short-term capital losses can be set-off against either short-term capital gains or long-term capital gains. So plan properly and then execute this strategy if you’ve done your homework well.
(Contributed by Nidhi Dogra, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)
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The RBI as Indian Rupee’s saviour
- High Crude prices and Inflation
- Dollar demand by Oil marketing companies, importers and FIIs
- Fiscal and Current account deficit
- US Rate Hike leading to investment flow-outs
Here, the RBI steps in as a parent, taking the following actions to prevent the Indian Rupee from falling in value against the US Dollar and to maintain its FOREX war chest:
1) Rupee Internationalization: The RBI has allowed settlement of export-import invoices and payments in Indian Rupees rather than only in other foreign currencies like the US Dollar to reduce the need for dollars in commerce.
2) Relaxation on FPIs’ Short-Term Debt Investments: Foreign Portfolio Investors’ (FPIs) short-term investments in G-Secs and corporate bonds made between July 8, 2022 and October 31, 2022 will be exempted from the 30% limit on short-term investments. This action would encourage FPIs to increase their investment in our short-term debt securities.
3) The Elimination of Interest Rate Cap on Non-Resident Deposits: For additional deposits that banks pull up by October 31, 2022, the interest rate ceiling on FCNR Banks and NRE deposits is temporarily removed. So, banks can offer higher interest rates to entice deposits from non-residents in foreign currency.
4) Exemption on CRR/SLR on additional Non-Resident Deposits: Additional term deposits mobilised in FCNR(B) and NRE accounts till Nov 4, 2022 will be exempt from maintenance of CRR/SLR. This will encourage banks to accept more deposits from non-residents.
5) Relaxations in Foreign Currency Lending by Indian Banks: Banks can now lend overseas foreign currency to a larger range of borrowers instead of just export financing. This will help the Indian businesses that are facing trouble in raising international finance.
Hopefully, these measures will help the Indian rupee thrive against other international currencies.
(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)
Should you wait for more time to invest?
Every time the market declines or starts going up, questions like these come up in investors’ minds.
It certainly can, as there is no way to predict the bottom of the market, but in the long run, equity has historically always outperformed all other asset classes. We have seen how some people missed out on the 2020 buying opportunity in the hope of a further drop or with a view that ‘it is all over now…forever’!
Nobody can say that. But savvy investors start ‘accumulating’ when worst seems to be over – investing in small amounts at regular intervals, like going through STP (Systematic Transfer Plan) route in equity Mutual Funds, as we have been doing for our investors. Continuing SIPs throughout your investing period is also very important.All that is required is to ensure that your investments remain aligned with your goals. That’s why it is advisable to have a proper financial plan as it reduces the stress of picking and choosing investments and when to buy and sell.
These downturns can be smart buying opportunities for long-term wealth accumulation. Those looking to invest in bulk can go through the route of STP to ride through this prevailing volatility in the market, with bullet investments when required as we have been doing for our investors.
Also, remember that investing in equity requires a long investment horizon of at least five to seven years. One should continue to accumulate on dips rather than try to predict the bottom.
Time in the markets and not timing the markets is the golden mantra here.