Radhika Gupta and Edelweiss are not exactly the most popular words in the mutual fund industry today. Many bond fund managers, CEO, and promoters have seen their PnL rattled – or at least the perception that things could change. Personally I have not stopped my SIP into an ultra short bond fund, so change I think takes time for most lazy investors!

How should you use a ETF for tax planning?

Well no IFA is going to tell you this. No CA or banker is going to tell you this. Well even the amc which launched this has not done an article about this. Well. Well.

One of the smartest things to do in life is to change your current income to capital gains. So if you are a 35 year old wanting to keep some money in debt funds you could shift to a debt fund with growth option. Or you could buy an ETF. The savings is in costs.

Let us say you have a portfolio of Rs. 10 crores and you have Rs. 4 crores in bank deposits. Just shift Rs. 2 crores to an ETF or a ultra short (or short) term bond fund. Make sure that you do not touch the fund for a long period of time. Say the fund gives you 8% return – which means the increase in NAV is about Rs.16L in one year, and at the end of 3 years the value is Rs. 2.54 crs. At that stage you have a capital loss of Rs. 80L, you should sell your ETF and book the long term capital gain of Rs. 54 L. Thus you have realized your  profit WHEN YOU WANT TO. Say you want to realize only 20L of profits, you can do that too.

What a bond fund does for you is what a ‘growth option’ does for you. However, it does it at a lower cost. Sadly not too many people use it as a tax planning tool. I think for people who have no other option (senior citizens have better yield options, but post tax this is better). So on a Rs. 2 crore debt portfolio if you have put Rs. 30L in senior citizen schemes, and say Rs. 25L in bank fixed deposits (interest will be tax free) you should put the balance in ETF and hold till maturity. Ok, ok, keep some money in Ultra short bond fund too! As and when the ETF market develops we can hope to see 5 year, 10 year, 15 year and hopefully 25 year GILT ETF. I would rather buy these instead of buying an ETF. Both are taxable, but I can reduce the tax on a bond fund exit much better than what I can do with an annuity.

So lower costs, flexibility, lower tax rates – what more can I want? However not much of this is useful for a person who has created a ultra short bond fund for some specific purpose – like doing a STP. It is too cumbersome if you have to sell ETF bring the money into a savings account and then do a STP.

It is not of much use for a person who does not already have a brokerage account and a trading account. Getting these just for doing ETF investments is not worth its while especially if you are planning to keep say 2-3 million in an ETF. Also the brokerage that your broker charges you for an ETF transactions – especially if you are going to trade – all these need to be considered.

As they say, there is no free lunch.

Sadly even today not enough people think of all this while investing.

By the way this blog is free – there is no cash to be paid. I am happy that you are giving it your time. Thanks.

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  1. ETF (Exchange Traded Funds) are like mutual funds, although way cheaper? But what are the benefits of an ETF over Mutual Funds. And also, since mutual funds have made a name for themselves in the market, and ETF’s are a wholly new concept, why would an individual invest in ETF’s rather than a mutual fund?

    Thank you,
    Sanjeev Nanda

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