Navigating a New Era
Tax savings cannot be a reason to invest. You invest to generate returns and not to save taxes.
This seems to be the lesson of the financial year ending March 31, 2023.
The Union Budget did away with the indexation benefit available for debt mutual funds while computing long-term capital gains and did away with the 20% tax on such capital gains. Hereon, capital gains will be taxed at the rate applicable to one’s income.
The knock that equities took during the year has made investors have a healthy respect for asset allocation.
Having all investments or most of one’s investments in equities is an extremely risky approach, especially if one is considering them for a specific purpose with a targeted date.
Another key development during the financial year was the setting up of a ‘backstop’ fund for ensuring that corporate bond prices don’t crash due to redemption pressure caused by a liquidity event.
Termed the Corporate Debt Market Development Fund, this facility will have a corpus of around Rs 33,000 crores and will be used to provide liquidity to MFs to meet redemption pressure.
What do these two developments mean for fixed-income investors?
The removal of the tax advantage for debt mutual funds means that fixed-income investors will now have to look to identify yield-generating avenues on their own. The tax advantage provided] earlier to debt funds offered better post-tax returns for investors of well-managed funds
Now that the tax advantage is no longer available, investors will have to learn to identify opportunities on their own or seek the advice of financial advisors.
The creation of a safety net for bond funds means that bond investors holding investment-grade bonds will not face a sharp fall in the value of their bonds because of distress selling by institutions if there is a liquidity crunch.
Is it a good time to buy bonds?
Well, there is no time to start investing like the present.
Of course, the current scenario presents a unique opportunity. Interest rates in the bond market have risen after the Reserve Bank of India began raising rates last year.
This means that new bond issuances could come at a higher interest rate, which is good for investors looking to lock in cashflows.
Also, the rise in interest rates has led to yields on many good-quality bonds rising. It may be a good idea to hunt for high-yielding good quality bonds.
Read up on our earlier piece on ‘Laddering up’ to know how this works.
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