EQUITY AS AN INVESTMENT VEHICLE IN INDIA
In India there are approximately 2.02 million retail investors which is a meagre 0.2% of the total population. Indian households have an inclination towards investing in safe haven bank deposits like Fixed Deposits or Government Securities like National Savings Certificate etc. Another asset that Indian investors readily park their savings is the yellow metal gold, for cultural reason but more certainly for a fact that the value is less volatile with lucrative returns.
This is given by the fact that Indian households hold 25000 tonnes of gold.
But, what is even more mind-boggling is that the Sensex-rose from INR 1027.38 in 1991 to INR 47848 at the penultimate day of fiscal 2020 giving a CAGR i.e. compound annual growth rate of 13.659% whereas an investment in FD yields around 7-8%.
There are various instruments except the traditional direct investment in equity which do not require significant knowledge like Equity Mutual Funds which are open-ended funds and are professionally managed generally to a specific mandate like Mid-Cap, Small-Cap and Large-Cap etc. ETF’s -Exchange traded fund- which have a basket of equity stocks underlying every unit of ETF. Most famous in the Indian Stock Market is NIFTY ETF’s. The most prominent feature is that as an investor you hedge by diversifying amongst various sectors of the economy like Banking, Energy, FMCG, Material, IT, Pharma etc. Next we have Equity Linked Savings Scheme-that are similar to Mutual Funds except that they are close ended. Equity investments entail a return roughly 13-14% over a decade and a half.
Equity investments entail a:
· 15% tax on STCS-(Small Term Capital Gain) on capital gains earned within one year.
· 10% tax on LTCG-(Small Term Capital Gain) on capital gains in excess of INR 100,000 earned over an investment horizon greater than a year.
The dividends are taxed according to the tax slab in which the investor falls.
ELSS-(Equity Linked Saving Scheme)-
They offer a restriction on redemption till 3 years. There is no upper limit on investment in ELSS however tax deduction is to the tune of INR 150,000 that isn’t offered in other mutual funds (Under section 80C of Income Tax Act) Dividends are tax exempt.
Regards,
Nitesh Gupta, FCA