Key Taxation Reforms
Reduced Holding Period: The holding period for equity FoFs, international funds, and gold mutual funds has been shortened from more than 36 months to more than 24 months to qualify for LTCG benefits.
Revised LTCG Tax Rate: The LTCG tax rate for these funds has been reduced to 12.5% for investments held for more than 24 months. Previously, investments held for over 36 months were taxed at 20%. The STCG tax rate remains tied to the investor’s income tax slab.
Impact on Investors
The Budget’s adjustments to the tax structure have significantly enhanced the appeal of international and gold mutual funds. The lower LTCG tax rate and reduced holding period mean that investors can achieve favorable tax treatment sooner and at a lower tax rate. This makes these funds more accessible and potentially lucrative for long-term investors.
Pre-Budget vs. Post-Budget Scenario
Before Budget 2024: International funds and gold mutual funds were taxed as STCG at the investor’s slab rate if held for less than three years. Investments held for more than three years were taxed as LTCG at a 20% rate.
After Budget 2024: The LTCG tax rate has been reduced to 12.5%, applicable for investments held over 24 months. Investments held for less than 24 months continue to be taxed as STCG, aligned with the investor’s slab rate.Advantages of International and Gold Funds:
International and gold funds offer investors diversification by spreading investments across different asset classes and geographies. This diversification helps manage risk, especially in volatile market conditions.Gold mutual funds serve as a strategic hedge against inflation and economic downturns. Gold’s intrinsic value often provides stability during periods of economic uncertainty.
International funds, particularly those invested in the US markets, offer exposure to global economic growth and currency movements. This can provide opportunities for significant returns, especially during periods of favorable currency depreciation and economic recovery.
International Funds: Over the past year, international funds have delivered an average return of 12.53%. The highest return was recorded by Mirae Asset NYSE FANG+ETF FoF at 51.83%. Conversely, the Mirae Asset Global Electric & Autonomous Vehicles ETFs FoF faced a loss of approximately 16.93%.
(Trailing returns as on July 25, 2024)
Source: ACE MF
Gold Funds: Gold funds have performed strongly, with an average return of 14.54% over the past year. The UTI Gold ETF FoF led the category with an 18.73% return, while the Edelweiss Gold and Silver ETF FoF offered the lowest return at around 10.96%.
Trailing returns as on July 26, 2024)
Source: ACE MF
Given the favourable changes, investors are advised to consider systematic investment plans (SIPs) and systematic transfer plans (STPs) when investing in these funds. Despite the positive outlook, market volatility may persist, so a minimum investment horizon of five years is recommended. This approach helps mitigate risks and provides the potential for substantial long-term gains.
Final Thought
The 2024 Budget reforms have made international funds, gold funds, and equity FoFs more attractive by offering better tax benefits and a shorter holding period for LTCG. These changes present an opportunity for investors to diversify their portfolios and optimize returns. However, as always, it’s crucial to align investment choices with individual risk tolerance, investment horizon, and financial goals.
(The author of the article is Chakravarthy V., Cofounder and Executive Director, Prime Wealth Finserv)