Saturday, March 01, 2008

Stay invested for long-term

SHORT-TERM CAPITAL GAINS TAX The move is aimed at addressing the issue of market volatility.

Day traders and aggressive investors, beware. An otherwise moderate Union Budget 2008-09 has decided to come down heavily on this class. With the hike in the short-term capital gains (STCG) tax, from the erstwhile 10 per cent to 15 per cent, the finance minister has attempted to curb speculation-oriented trading by individual investors.

This move has been induced by the roller-coaster ride taken by the bourses throughout the last year, and especially in the initial public offering space, where the Reliance Power IPO made a debacle.

The assumption here is that a hike in STCG would encourage small investors to hold on to their investments for a longer time and curbing volatility.

Ravi Sharma, chief executive officer of Birla Sun Life Distribution, says, ?It is a common notion that many investors made hay through short-term investments, thus adding to the volatility. But in the longer run, it would not deter the investor, because earlier he entered the bourses with a threshold exit price of over say, Rs 110 on an investment of Rs 100, while now that threshold will stand at Rs 115.?

Further, this hike in STCG will affect the small investor only marginally because of the sheer quantum of their trades. Institutional investors, arbitrage desks of large banks and large individual investors will be the one taking the hit.

Besides, with the prevailing state of the markets, there are not many investors who enter with a short-term view,? adds Sharma.

Arpit Agarwal, managing director, Dawnay Day AV Securities, giving a different insight says, ?The proportion of cash transactions in the total turnover of the markets is hardly 15 per cent, while the larger chunk of action lies on the futures & options side. Besides, earlier too, investors paid STCG at 20 per cent, which was brought down to 10 per cent last year. So a 50 per cent hike in this tax is soon likely to be forgotten.?

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