If I invest in stocks on my own or invest through a portfolio management service, can I earn better post-tax returns?
In the last 10 years, the portfolios of many full-time stock investors in India have outperformed those of active mutual funds because individuals, if they get their stock selection right, can overcome some of the constraints of fund managers who pool money from many investors. Smart individual investors can concentrate their portfolio, sit tight on good stocks through bad phases, not be hauled up for short-term results and avoid the typical retail behaviour of buying high and selling low. But then, being a direct stock investor requires a great deal of time and effort that isn't easy to devote if you have a demanding career in some other field. Thus, for most investors, it makes sense to rely on equity mutual funds for long-term wealth creation.

The new LTCG tax, in our view, further strengthens the case for taking the mutual fund route over direct investments because mutual funds will not pay short-term or long-term capital gains tax every time the fund managers churns the portfolio. The investor in the fund, therefore, will only have to pay LTCG tax for the final gains that the fund delivers to him at the end of his holding period. As a direct investor, you will have to bear a tax incidence (LTCG or STCG) every time you replace a stock in your portfolio. Unless you are a genius at stock-picking who gets everything right the first time, LTCG tax can now have a significant impact on your long-term returns.

Portfolio management schemes (PMS) do not enjoy the pass-through benefits of mutual funds. Many of them rely on considerable churn in investor's portfolios to deliver high returns. The LTCG tax can thus end up taking a bigger bite out of the long-term returns of PMS schemes. Mutual funds are also better vehicles than PMS on flexibility and transparency, as you can independently benchmark mutual fund performance to the index and to peers, and switch out from underperforming funds at a time of your choice. In short, the mutual fund route scores over both direct stock investing and PMS for most investors.

Now that equity-linked savings schemes (ELSS) from mutual funds have become taxable at maturity, should I shift to ULIPs to continue to enjoy EEE (exempt-exempt-exempt) benefits?
No. It is true that your withdrawals from ELSS will now be subject to a 10.4 per cent LTCG tax when you redeem units, while withdrawals from ULIPs remain tax-free. However, there are three non tax reasons why we have traditionally recommended that investors prefer ELSS over ULIPs for their tax saving investments. They still hold good.

Mutual funds are far more transparent than ULIPs when it comes to benchmarking and peer comparisons. Mutual funds work out to be less expensive on costs over their lifetime, while the costs in ULIPs are front-loaded and opaque. Finally, ELSS carry only a three-year lock-in period while ULIPs require a five-year lock in. Given the manner in which the government has plugged all the tax loopholes in its last few budgets, we won't be surprised if ULIPs are brought into the tax net in future years, too.

Don't worry about double taxation!
How unfair is LTCG
The grandfathering clause