Mutual funds are a better investment option than stocks from a tax point of view; know why
tax on stocks and mutual funds stays. It has been seven years since this tax was introduced and the only change has been the rate increase from 10% to 12.5% this year. This is now the uniform rate not just for stocks and equity funds, but for many other types of investments. However, this is where the similarity ends. For investors who want to earn long-term returns and build real wealth through equity-based assets, the tax structure means that significant attention needs to be paid to where they invest and when they buy and sell those investments.
The single most important point to be noted is that it’s far more beneficial, from a tax point of view, to invest in mutual funds than stocks. While this has been true since February 2018, the hike in long-term capital gains tax in this year’s Budget has made it that much more important. In any case, even earlier, many investors did not appreciate this about taxation.
I’ll recap the underlying principle. All equity portfolios need some buying or selling as individual stocks become more or less desirable. This is true even if you are good at choosing stocks and holding most of these for several years. Time goes by, circumstances change, companies and markets evolve, and the formerly good stocks have to be sold and something better bought. If you are investing in stocks yourself, these transactions will translate into tax liability.
However, in an equity mutual fund, the fund manager does the equivalent trading within the fund. You don’t have a tax liability because you
