Asset allocation is a simple yet powerful strategy to
balance risk and return of a portfolio by diversifying investments across asset
classes.
Asset allocation is unique to each individual and one needs to take a holistic view of his/her situation to arrive at an optimal allocation. This includes considerations like return expectation, risk appetite, time horizon, taxes applicable, liquidity requirements etc.
Establishing your asset allocation is both a science and art. While sophisticated software/psychometric tests can assist in understanding your profile, the ideal optimal allocation includes subjective factors like risk tolerance and willingness to take risk.
In order to ensure long-term portfolio success, investors need to have a disciplined strategic asset allocation in place wherein the weightages are clearly defined. However, tactical changes to the strategic allocation can be implemented based on market opportunities.
Tax Efficiency & Financial Instruments
The tax structure in India is clearly in favour of long-term investments. Indian capital markets offer investors plenty of investment choices across asset classes. Within equity, investors can choose from stocks, equity mutual funds, portfolio management schemes and private equity. Long-term capital gains and dividend from equities are tax free in the hands of investors.
Similarly, under fixed income, investors can opt for fixed maturity plans, other bond funds, government and corporate sector bonds as well as fixed deposits. Indexation is allowed for debt mutual funds held for more than one year thereby enhancing post tax returns. Within debt, taxation in mutual funds is lower compared to interest income.
While interest income from fixed deposits and bonds is fully taxable, regulation do allow for long-term capital gains and losses from debt to be set off against each other. For example, investors having eligible carry forward long-term losses can offset long-term capital gains from debt investments under the growth option.
Fixed Income
Take the case of the recent issuance of tax-free bonds by NHAI and Power Finance Corporation. On a ten-year bond, these offer a tax-free return of 8.2%. To earn a similar post-tax return, an investor in the highest tax bracket needs to invest in a bank fixed deposit giving pre-tax return of more than 12%. Presently, bank fixed deposit rates are hovering around 10%. Such tax-free bonds are not regularly available; hence, investors should grab these opportunities as and when they arise.
An alternative to fixed deposits can be investment in bond funds or fixed maturity plans. In case the investment tenure exceeds 12 months, the appreciation is treated as capital gain which is more tax efficient when compared to interest income.
Equity
Investment costs/taxation tends to be higher in portfolio management schemes when compared to equity mutual funds. In a mutual fund, investors hold units of a fund and have no tax impact for changes in the fund's underlying holdings. However, in a portfolio management scheme, the stocks are purchased/sold in the investor's name thereby making them liable for short-term gains tax if sold at a profit within a year.
Under the present tax regulations, gains from transactions in futures & options (derivatives) are categorised under the head of speculative income. It is advisable for investors to keep F&O and regular capital market investments in separate books. Higher transaction costs and tax are a drag on long-term portfolio returns. Investors therefore need to be careful in selecting the right avenues with a long-term horizon in mind.
Finally, introduction of the Direct Tax Code may lead to certain changes. One should take them into account before making investment decisions.
Asset allocation is unique to each individual and one needs to take a holistic view of his/her situation to arrive at an optimal allocation. This includes considerations like return expectation, risk appetite, time horizon, taxes applicable, liquidity requirements etc.
Establishing your asset allocation is both a science and art. While sophisticated software/psychometric tests can assist in understanding your profile, the ideal optimal allocation includes subjective factors like risk tolerance and willingness to take risk.
In order to ensure long-term portfolio success, investors need to have a disciplined strategic asset allocation in place wherein the weightages are clearly defined. However, tactical changes to the strategic allocation can be implemented based on market opportunities.
Tax Efficiency & Financial Instruments
The tax structure in India is clearly in favour of long-term investments. Indian capital markets offer investors plenty of investment choices across asset classes. Within equity, investors can choose from stocks, equity mutual funds, portfolio management schemes and private equity. Long-term capital gains and dividend from equities are tax free in the hands of investors.
Similarly, under fixed income, investors can opt for fixed maturity plans, other bond funds, government and corporate sector bonds as well as fixed deposits. Indexation is allowed for debt mutual funds held for more than one year thereby enhancing post tax returns. Within debt, taxation in mutual funds is lower compared to interest income.
While interest income from fixed deposits and bonds is fully taxable, regulation do allow for long-term capital gains and losses from debt to be set off against each other. For example, investors having eligible carry forward long-term losses can offset long-term capital gains from debt investments under the growth option.
Fixed Income
Take the case of the recent issuance of tax-free bonds by NHAI and Power Finance Corporation. On a ten-year bond, these offer a tax-free return of 8.2%. To earn a similar post-tax return, an investor in the highest tax bracket needs to invest in a bank fixed deposit giving pre-tax return of more than 12%. Presently, bank fixed deposit rates are hovering around 10%. Such tax-free bonds are not regularly available; hence, investors should grab these opportunities as and when they arise.
An alternative to fixed deposits can be investment in bond funds or fixed maturity plans. In case the investment tenure exceeds 12 months, the appreciation is treated as capital gain which is more tax efficient when compared to interest income.
Equity
Investment costs/taxation tends to be higher in portfolio management schemes when compared to equity mutual funds. In a mutual fund, investors hold units of a fund and have no tax impact for changes in the fund's underlying holdings. However, in a portfolio management scheme, the stocks are purchased/sold in the investor's name thereby making them liable for short-term gains tax if sold at a profit within a year.
Under the present tax regulations, gains from transactions in futures & options (derivatives) are categorised under the head of speculative income. It is advisable for investors to keep F&O and regular capital market investments in separate books. Higher transaction costs and tax are a drag on long-term portfolio returns. Investors therefore need to be careful in selecting the right avenues with a long-term horizon in mind.
Finally, introduction of the Direct Tax Code may lead to certain changes. One should take them into account before making investment decisions.
Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/investment-with-judicious-tax-planning/articleshow/12154939.cms
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1 comment:
As said the tax planning with proper investment plan will save a lot of our money. Thanks for the information and do add up more info on tax savings and tax planning methods..
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