Let the dust settle on tax shocker, but MF investors can stick to SIP route: Experts | Stock Market News

Let the dust settle on the budget’s tax shocker before chasing any likely dip, but mutual fund investors can continue their investments—In sum, that’s the message from stock market veterans for retail investors, after the Union budget proposed higher capital gains tax for profits from share sales.

“The rise in long-term capital gains tax is severe, but the prospects of the market remain the same; so, any likely adverse reaction from here onwards might be short-lived,” said Raamdeo Agrawal, chairman & co-founder, Motilal Oswal Financial Services. “Retail investors should continue their equity asset allocation through the systematic investment plan (SIP) route, which is the best way for them.”

Finance minister Nirmala Sitharaman increased the long-term capital gains tax (LTCG) to 12.5% for gains above ₹1.25 lakh from shares sold after a year, from 10% on gains above ₹1 lakh earlier. Short-term capital gains tax was raised to 20% from 15% on gains from sale of listed shares held for less than a year.

“We might have a short spell of volatile trade, but investors will take the impact of the hikes in their stride as they are making money from investments,” Agrawal said after the budget speech concluded.

Agrawal’s expectation that the dust would settle soon seemed to ring true, with the Nifty and Sensex recovering sharply from the day’s low. The market moves were mirrored by fear gauge India Vix, a measure of market risk, closing significantly off the day’s high.

Shortly after the announcement of higher capital gains taxes, the Nifty plunged 1.77% to the day’s low of 24074.2, but recovered sharply to close just a tenth of a percentage point lower at 24479.05. Similarly, the Sensex, which tanked 1.6% to the day’s low of 79224.32 , recovered to close 0.09% lower at 80429.04.

On Tuesday, foreign institutional investors (FIIs) sold shares worth a provisional ₹2,975.31 crore, while domestic institutional investors (DIIs) bought shares worth ₹1,418.82 crore.

India Vix, which surged to an intraday high of 16.07, coinciding with the market’s intraday fall, closed a whopping 17.42% lower at 12.75, as the markets recovered. The higher the Vix, more the volatility, and vice versa.

A. Balasubramanian, MD & CEO, Aditya Birla Sun Life MF, said that the impact of the tax increase was “negligible” on investments held for three to five years and “market buoyancy” would continue, “albeit not at the pace seen in the past two-three years.”

“A 2.5 percentage point increase amounts to just 0.5 percentage extra tax per year for a five-year holding period, which is negligible, given the scope of profits on investment,” said Balasubramanian. “Investors could continue their SIP allocations with focus on sectors such as capital goods, consumer durables and IT, given the savings on tax for salaried individuals in the ₹7.5-10 lakh bracket, stress on infra development, etc.”

However, other experts said the broader markets and sectoral indices like Bank Nifty could underperform benchmarks, thanks to higher short-term capital gains tax and pressure on lenders from repricing deposits. This could increase overall market volatility.

“There is a possibility that given the hike in STCG, PSU banks and mid- and small-caps which have relatively high retail shareholding could witness a correction, with no sight for a relief on the net interest margin front,” said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies.

Indeed, Nifty PSU Bank was among Tuesday’s biggest sectoral losers, closing down 1.4% to 7218.9. This, in turn, dragged the Bank Nifty lower by 0.96% 51778.6. The Nifty Midcap 150 index ended 0.44% lower at 20947.8, while the Nifty Smallcap 250 index closed 0.6% lower at 17212.5.

Aditya Birla Sun Life’s Balasubramanian also believes that bank stocks might move sideways in the sessions ahead. This could limit potential gains for the market, as financials’ weighting in the Nifty stood at a record 34.44% at the end of June.

A potentially deeper pullback is also premised on weaker corporate earnings in the current quarter, after early-bird Q1 earnings of 204 companies showed aggregate net profit falling 10.7% on higher input costs. Also, a rate cut by the Reserve Bank of India seems distant, Holland added.

While the Nifty trades at a trailing price-to-earnings ratio of 24.57, in line with its five-year average PE of 24.67 times, the Nifty Midcap 150 currently trades at 43.01 times (35.47x) and the Nifty Smallcap 250 index at 33.81 times (28.3).

This fact, coupled with the tax hikes, makes some analysts pessimistic.

“It’s (tax hikes) overall negative for the markets,” said Shankar Sharma, founder, GQuant Investech . “When a long-term capital gains tax was introduced in the Budget 2018, we had a bear market for two years and now that the rate has been increased by 25% for long term and over a third for short term. We’ll have to wait and see before buying any dip. Let the dust settle. For futures and options, it was understandable, but why taxes were raised on equity cash is inexplicable given its role in capital formation and presence of small retail,” Sharma said.

The Union budget also continued the interim budget’s strategy of not keeping targets for disinvestment and asset monetization. Proceeds from both categories were kept at ₹50,000 crore in the budget documents, under the ‘miscellaneous capital receipts’ category.