Post the announcement of LTCG on equity and the ongoing global stock correction, the Indian stock markets have fallen by around 5-6% at the index level. The correction has been brutal on the small and mid-cap front where some stocks have lost more than 15-20%.
The conventional advice in times such as these is ‘stick to your SIPs’ and ‘don’t panic.’ This is GOOD advice and like all good advice, hard to follow. The toughest part of dealing with a slump is dealing with the anxiety and panic in one’s own mind with every successive drop in the markets. Should I sell? Should I invest more? Questions like these don’t seem to go away. Often we buy too early only to see markets fall further or sell too early, only to note that the correction was short-lived.
So here are some unusual remedies to cure stock market depression.
Approach stocks through the NPS
Investing in the NPS will help you defeat your biggest enemy – you. The NPS Tier I will lock in the money you put into the market in a slump. Any panic or second thoughts in your mind after this investment will be of little use because you will not be able to act on them. This is a bit like the Greek Mythological hero, Odysseus tying himself to the ship’s mast to prevent himself from falling prey to the singing of the deadly sirens. The Tier I allows an equity allocation up to 50% under the NPS Active Choice.
The NPS is also more attractive following the imposition of the long-term capital gains tax on equity and equity mutual funds. This is because shifting between equity and debt mutual funds is likely to attract capital gains tax, either short term or long term. However, shifting between the NPS equity and bond funds do not incur any tax at all. It is only when you withdraw your NPS corpus, that you are liable to pay tax.
Note however that the NPS is NOT an instrument of short-term trading. It locks you in till the age of 60 (with a few exceptions, as explained in this article) and can only work if you can forget your money for a long, long time and stomach the risk of equity investing.
Dip your toes into gold
Gold has been the unloved stepchild of the bull market in equities that started in 2014. Returns on gold over the past five years have just been -1.65% per annum, compared to 17.73% for multi-cap equity funds. On the other hand, 10-year returns on gold are a more respectable 9.1% per annum. Along with other reasons, this may mean that gold is due for a mean reversion. If you have a very small gold exposure, you can consider increasing it, either through gold ETFs such as Goldbees or Gold Mutual Funds.
Go shopping abroad
Following the LTCG on equity funds, international funds increasingly look like good alternatives. These funds are treated as debt funds for tax purposes. This means that you pay a 20% long-term capital gains tax after a holding period of three years. Although this rate is higher than the 10% long-term capital gains tax on equity funds, international funds get the benefit of indexation whereas equity funds do not. Once this is factored in, the effective tax rate on international funds can fall far below 20%.
In addition, because these funds invest in foreign stocks, they are shielded from drops in the rupee that often go in tandem with global market corrections.