The stock market – you either love it, hate it, or love to hate it! But regardless of which category you fall under, you simply cannot ignore the fact that when it comes to helping you create long-term wealth, few (if any) instruments outclass equities. While the roller-coaster ride that stock markets can sometimes entail can be disconcerting for many; those who stay the course for the long term while keeping their emotions in check, almost invariably end up with handsome returns.
Markets tend to exhibit their most protean behaviour prior to a landmark event; the budget being no exception. Speculation aside, what are the key budget-led changes that could impact equity investors in the long run? Here are three likely ones.
Change in capital gains taxesEver since PM Narendra Modi indicated that the tax collections from equity market profiteers should be higher, markets have been rife with conjecture. “Those who profit from financial markets profit must make a fair contribution to nation-building through taxes,” the Prime Minister had said.
While FM Arun Jaitley clarified that there’s no intent to tax long term capital gains from equities, there’s a distinct possibility that the definition of “long term” will undergo a change from the present one year to two, or perhaps three years. The tax-free nature of equity dividends is unlikely to undergo a change. Recently, there has been talk of the government’s intent to impose an LTCG tax on Z-Group securities.
While any increase in the definition of “long-term” may suck some liquidity out of the market (relatively hot money that is being invested for 1 to 3 years), it could, in the long run, lend more stability to the markets by increasing the average holding period for equity investments. If you’re a fundamental investor (the correct variety), you needn’t fret.
Having said that, any change in LTCG if announced in the budget is bound to have a bearing on the short-term market direction. Investors are advised to not attempt to “trade the news”!
A facelift for the RGESSLaunched in 2012 and monikered “UPA’s Dud” by some in recent times, the RGESS hasn’t quite lived up to its promise. Despite the additional tax break available to RGESS investors under Section 80CCG, it’s growth momentum has been tepid, at best.
According to Valueresearch, RGESS Funds have a combined AUM of 13,816 crores as on date. Two funds (SBI ETF SENSEX and CPSE ETF) hold dominant positions, along with a few funds in the near-1000 crore range, and a smattering of insignificantly sized ones.
The intent behind the RGESS was to draw more first-time investors into the fold; but this resulted in an inexplicably complicated entry process. In this budget, there’s a good chance that the RGESS will either be replaced with an improved scheme along the same lines, or that the existing fund will be extended to all investors who are not just first-timers. The associated tax breaks may be increased as well.
A whittling down of account opening formalitiesIn line with its theme of promoting financial inclusion, the government may take steps in this budget to reduce the cumbersome formalities required to open a demat/ trading account.
It’s also quite likely that a simple demat account will be piggybacked upon Jan Dhan Accounts, with little or no documentation requirement for investments up to a certain minimum threshold. Needless to say, such a move could dramatically increase retail participation in the stock markets; lending it more depth and breadth, and creating collective value.
As the markets see and saw and attempt to predict Budget 2017 outcomes, stand aside from the madding crowd and do what’s best: continue to accumulate stocks of fundamentally good companies for a five to seven-year period. Then shut your eyes and ears to the noise.
