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Before exiting an equity fund check your tax liability

MUTUAL fund investors often have a tendency to hold on to their investments for a long time without ever looking at it.


There are several problems with this kind of approach.


There could be a situation where the actual investment might be performing badly and the additional holding period does nothing to help the situation.

At the same time, there is also the risk that such a long holding of the lossmaking investment can even take the tax benefit away that otherwise might have been possible on the investment, especially in case of equity-oriented funds.

Here is a look at the issue and why investors need to regularly look at their portfolio to see if some action is required.


Long term: The first thing to constantly keep in mind is about the nature of the investment holding.


When it comes to various investments, including mutual fund units, they can be either long term or short term in nature. If the mutual fund units have been held for 12 months or less, then these would be classified as a short-term asset.

When the holding period exceeds 12 months, then it becomes a longterm asset. The classification of the holding is necessary because this determines the entire issue of whether the position of a loss can actually be salvaged to some extent.


Loss making: There are times when the investment does not work out as expected. It is easy to deal with the situation when there is a gain that is earned on the investment because this will mean just looking at whether there is a tax to be paid and how much the tax amount is.

In case of a loss, there is a far more complicated process at hand that one has to deal with and this includes the act of calculating the exact loss and then ensuring that there is some set off available. The first thing that many investors have to do is to actually accept the fact that there is a loss that they are incurring.

The next part involves looking at the nature of the loss and whether it is something that can be recovered. This is very difficult to judge because nobody knows how the future will actually turn out, but there is always something that often gives an indication to the investor.

A small amount of loss, which takes place due to short-term market movements, is not something serious in an equity oriented fund.

However, if the markets have collapsed and the fund is showing a 3040 per cent loss, then it might just be very difficult to recover for a long time to come. Nature and tax: In case of equity-oriented funds, if there is a long-term loss that is recorded on the sale of the units, then there is no tax impact.

This happens because of the fact that the equityoriented funds have a zero rate of tax on long-term capital gains, so there is no set off available for the loss that has been recorded.

On the other hand, if the units were sold before a year is complete, then there would be a loss all right, but the loss would be available as a set off against some short-term capital gains that has been earned. These are reasons why there has to be a constant evaluation of the portfolio.

It will give the investor an idea whether they need to take any immediate action or they can just sit back and watch the performance of the fund. In cases where the situation does not hold out much hope, the investor would be better off taking the loss in the short term, so at least, there is a set off available for them.
 

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