Financial Cocktail Samosas: Bitesized Money Morsels For You, 12/07/2023

Micro-cap funds have been in the spotlight ever since Motilal AMC recently launched its micro-cap index fund, which comprises the top 250 companies beyond the NSE 500 companies. These companies are the 501st to 750th largest companies in the country as per market capitalization.

• High Risk: Micro-cap companies are far more volatile than even the risky small-cap segment. This is so because they are less established and have fewer financial resources. As a result, they are more likely to fail or experience financial difficulties.
• Illiquidity: Micro-cap stocks are often illiquid, which means that they can be difficult to sell. This can make it difficult to get out of an investment if one needs to. There may be fewer buyers and sellers in the market, especially when the market trends downwards. This may impact the fund’s performance if the fund manager is looking to exit that stock.
• Reaction to unfavorable situations: Micro-caps have historically seen bigger drawdowns than small-caps and mid-caps amid unfavorable market situations such as COVID-19, Russia-Ukraine War, and so on.
• Shine or Fail: While only some micro-cap stocks will eventually rise to the club of a mid-cap or large-cap, a significant proportion of micro-cap stocks may fail or even exit the market.

It’s time for investments to go automatic!

The golden rule to get the best returns is ‘buy low and sell high’. But it’s not easy to practice this in real life.
Why?

Because of human emotional biases, inadequate knowledge of how markets work, and the micro-management of investments which may give thrills and nothing much more.                         
So, wouldn’t it be good if, like our automatic daily-use gadgets, our investments could be automated too? Fortunately, there is one category of mutual funds that eliminates the guesswork for investors: Balanced Advantage Funds (BAFs).
BAFs would give you the freedom to invest and relax as it dynamically adjusts the equity and debt allocation according to the market conditions – exactly what we need.

How BAF works?
These funds invest across equities and debt, and use arbitrage as a strategy, tactically moving between equity to debt based on market conditions.
This means that the fund automatically does the task of asset allocation, rather than manual work and because it is done at the fund level, it turns out to be more tax-efficient for investors.

So, what do we get from investing in BAFs?

• It dynamically allocates equity depending on the market trend. It doesn’t require you to time the markets.
• Aim to grow and give you important downside protection to your investment in bull and bear markets.
• Deals with equity markets and uncertainty without any bias.
• Tax efficiency- rebalancing between equity to debt by the fund manager without having any tax liability on the investor.
• Even after rebalancing, the tax treatment of the fund continues to remain equity-oriented, which is ultimately beneficial for investors, as equity fund investments pay a much lower tax rate as compared to debt funds.

If you are looking for a long-term investment that too without taking much effort and avoiding emotional biases, BAFs could be the right choice.

(Contributed by Sweta Kumari, Financial Planner, Team Vikrant, Hum Fauji Initiatives)

The Tax Journey of Selling Residential Property in India

Real estate holds a special place in the hearts of Indians, being a favored investment avenue alongside the allure of gold. But there can be a time when people decide to sell off their residential property. This decision can be due to various reasons like moving to a better house, relocating to another city, or maybe a financial requirement.
But selling off property is liable to tax in India.
What are the tax aspects to be considered when selling a property:-

1. Capital Gains: Similar to other capital assets, the profits earned from selling properties are treated as capital gains and are subject to capital gains tax.
2. Investment Term: The duration of your investment plays a crucial role. If you sell a property within 24 months of its acquisition, it is considered as short-term; more than this is a long-term investment.
3. Taxation on Capital Gains: Short-term capital gains are added to your income and taxed as per slab rates. Long-term capital gains are taxed at a rate of 20% with ‘indexation’.
4. Indexed Cost of Acquisition: To account for inflation and provide relief to taxpayers exists the concept of indexed cost of acquisition. This calculation involves multiplying the cost of acquisition by the Cost Inflation Index (CII) value of the year of sale and dividing it by the CII value of the year of purchase. CII, published by the Govt every year (it can be googled), helps adjust the purchase price for inflation, reducing the taxable gains.

For Example:
Ram bought a house in the financial year 2013-14 for Rs 31 lakhs and sold it in 2022-23 for Rs 50 lakh. It seems that Ram has earned a profit of Rs 19 Lakhs (= 50L – 31L) on which he has t pay a tax. Actually, it is the opposite!

Considering the CII values of 220 and 331 for the respective two years of purchase and sale as per Govt’s CII table, the indexed cost of acquisition would be Rs 51,60,423 [= 31,00,000 X (220 ÷ 331)]. Consequently, Ram incurs a long-term capital loss of Rs 1,60,423 (= 50,00,000 – 51,60,423). This loss can be offset against any other long-term capital gains for up to eight consecutive years.

However, if there were gains in this case instead of a loss, Ram would have paid tax at the rate of 20% after indexation plus a 4% cess.

(Contributed by Ujjwal Dubey, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)