Share prices tumbled last Friday, a day after finance minister Arun Jaitley presented the Union Budget. The immediate tendency is to believe that equity as an asset class is losing value. Sure, the S&P BSE Sensex crashed over 800 points. The value of your mutual funds measured through the net asset value also fell as a result. Over the next few weeks, you may see shares sliding even further.
Before you press the panic button, you may want to know a few things. Financial markets are driven by a number of factors.
The fundamental one is the profitability of businesses. If one reads through the fine print of the Budget, there is nothing much that erodes future profits of businesses. A quick reading of analyst reports by broking companies such as Motilal Oswal, Kotak Securities, among others, and by credit rating agencies like CRISIL and CARE Ratings does not highlight a single sector that is negatively affected by Budget 2018. They either call the Budget impact ‘positive’ or ‘neutral’.
When analysts write something like this, they talk of future revenue and profit growth of businesses. While some companies could be affected by an increase in import duty on certain items, most businesses are likely to benefit from the government expenditure in the rural sector as well as in roads and railways. Share prices tend to follow growth in profits. If profit growth of businesses is likely to be better or remain intact, those selling off shares are doing so to avoid paying tax or in panic.
So, who would sell?
Institutional investors have a lot of money at stake. These include foreign institutional investors, local mutual funds and insurance companies. The rich in India also have a sizeable exposure to equities.
The reasons for selling shares vary for each one of these. Foreign institutional investors (FIIs) may want to step back and look at the potential future returns in the context of the 10 per cent tax on future capital gains and the dividend distribution tax.
Commentary from some of them suggests that Indian shares could get relatively less attractive than before. Chris Wood, a known analyst at Credit Lyonnais, an influential foreign broker, said he would cut India overweight by 2 per cent and allocate that money to China after the Budget announcement. So FIIs, who follow his recommendations, are told that if you are investing Rs 100 next year and were planning to invest Rs 20 in India, you must now invest Rs 18. The extra Rs 2 can go to China since it looks relatively attractive. So, going forward, FIIs may bring in a little less money than before.
If mutual fund managers are to be believed, they are probably likely to sell shares to pay for high dividend payouts ahead of the March 31, 2018 deadline. The Budget imposes a 10 per cent tax on dividend distributed to investors from April 1, 2018. A lot of rich people have invested in a number of mutual fund schemes to generate a tax-free dividend income. These rich people may want mutual funds to distribute a tax-free dividend before April 1, 2018. So, mutual funds have reasons to sell shares in the short term.
What should individuals do?
The first thing you need to do is not rush to sell equity mutual funds that you already own or shut off your systematic investment plans. People are not selling because companies are going to do poorly in terms of revenue and profit. Many would be selling because they need cash to pay a higher dividend before March 31, 2018. As far as you are concerned, the government is not going to tax any capital gains you accrued till January 31, 2018. This is called ‘grandfathering of the investment’.
For any capital gains you book after January 31, 2018, only the gains you make after January 31, 2018 would be taxed at 10 per cent. Considering the selling ahead of the March 31, 2018 deadline, there is limited chance for you to clock any capital gains on your mutual fund investment in the two months to the end of March 2018. Also, that is applicable only if you have crossed the capital gains limit of Rs 1 lakh.
If you read up equity investing related literature of famous investors, you may know that the best time to buy shares in a fundamentally strong market is when some others are selling. If you have opted for a dividend-paying scheme of equity mutual funds, you may see a windfall in the short term. As an individual, you may be better off staying put.
The writer is Publisher and Founder at Simplus Information Services Pvt Ltd
why you should stay put
Analyst reports by Motilal Oswal, Kotak Securities, CRISIL and CARE Ratings do not highlight a single sector that is negatively affected by Budget 2018
10%
For any capital gains you book after January 31, 2018, only the gains you make after January 31, 2018 would be taxed at 10 per cent
Rs 1 L
Also, that's applicable only if you've crossed the capital gains limit of Rs 1 lakh