Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.

Update on Markets and Budget Implications

Blog Blog Details
  • February 12, 2018
  • Aashish Somaiyaa|

Dear Investors and my dear Advisor friends,

The Finance Budget of the Government of India has introduced long term capital gains tax at the rate of 10% on gains from sale of equity assets held over a period of one year with a caveat of grandfathering of prices as at 31st January 2018.

If we had our way thinking from investors perspective because we ourselves are our biggest equity investor; we would have loved to have continuance of the holiday on capital gains tax, but considering national imperatives if a tax indeed had to be introduced, then we believe this was probably the best way of doing so. In the past there has been discontent on implementing policy changes which impact investments made in an older tax regime with no view on what could come up in future. But the budget is clear that all gains made by investing in the past all the way up to the highest price on the day of January 31, 2018 are not to be taxed. The tax will be applicable only on the gains from the highest price of January 31, 2018 or the cost, whichever is higher and only on gains of over Rs. 1 lac in a financial year.

The markets have not reacted too well to this announcement. It is difficult to isolate how much of the market reaction is towards the introduction of tax and how much of it is because of fiscal slippage and resultant rise in bond yields in India, or because of a global correction in response to rise in US bond yields and imminent Fed action to move on inflationary expectations. Few things that we would like to submit for investors consideration:
1. Taxes are an outcome; an outcome only if one has a gain. In many ways, a happy problem to have. This means the returns come first and tax comes later. After this tantrum in the market, investors will eventually go back to evaluating investments based on their relative return potential

2. Even before this budgetary announcement came in, the markets were perceived to be over-valued and they were priming for a correction. When this is the state in the market, any trigger can cause a much-anticipated correction and talking of triggers we can t have our choice of what s a nice trigger and what s not a nice trigger. Usually a trigger that makes the market correct significantly is one which impairs growth potential of the underlying investment. It s very rare one gets a correction basis a trigger which only impacts the tax on the outcomes and not the potential outcomes itself. To that extent, let s just call this a market tantrum like a teenager would when they don t have their way

3. Yes; growth potential can be impacted if the macro turns challenging with rising rates and the US scenario, there is increasing credence being given to such narrative and we cannot turn a blind eye to the changing macro. But having said that, how to position portfolios is a key aspect. We believe the budget has done enough to spur growth in sectors that we tend to own as pre-dominant positions in our portfolios. In the background the economy is improving and corporate results have surprised on the positive. We believe that when the dust settles, there will be returns to be made and what we are witnessing now and may do so for another few days, will present good opportunities

4. In the last 6 months we have received concerns relating to underperformance vis-à-vis benchmark indices where we had sent a note dated Nov 30, 2017 explaining that we have been underperforming due to high quality high growth focus whereas in the market high beta, cheap, contrarian, cyclicals and deep value ideas like PSU Banks, Metals, Telecom, Real Estate etc. have been flying. From our investors perspective this huge beta correction in indices would eventually ensure we close the underperformance and start gaining alpha because whatever the budget has done is beneficial to our portfolio positions

5. Lastly on the markets, our past experience shows that whenever the market corrects due to global concerns and Foreign Investors (FII) selling, eventually when the dust settles they buy back more than what they sold because the impact of global events on domestically oriented Indian companies is very limited and if at all, its short term. Our portfolio strategies are typically 60-70% domestic economy centric

Moving forward, this note elucidates on the implications for our investors. Investors participate by way of direct equities, PMS, AIFs and Mutual Funds when it comes to investing in equities. While the budget documents and the Honorable Finance Minister s speech deals with just introduction of tax, there are different implications for each mode of investing depending on who is the underlying investor and what is the corporate structure of the vehicle of investment.

Mutual Funds continue to be an attractive proposition considering that they are sheltered entities and buying and selling within the fund done by fund managers doesn t attract capital gains taxes. In the past even redemption of funds after a year did not attract capital gains tax. To that extent there is a change from here because now there will be 10% tax on gains at the time of redemption. 

Direct investing into equity, investing via PMS and AIF have similar implications except that in an AIF the fund settles the tax and investors receive “tax-paid” returns whereas investing directly into equity in one s own account or investing via PMS is absolutely the same. In the past these had to pay short term capital gains tax if there was any sale of shares done in a period under one year from date of purchase. There was no tax to be paid on gains made one year from the date of purchase. Now there will be a 10% tax levied on sale transactions on the capital gains for holding period even in excess of 1 year from date of purchase. On the other hand, PMS and AIF and direct equity now have one important avenue opening up which was not possible in the past. While there is tax on long term gains, that means we will be able to use any long term losses to offset these gains.

When investors compare long term capital gain taxation on Mutual Funds with direct equity or PMS the broad implication of taxation is similar. In MFs the tax implication is point to point from cost of investment to redemption or maturity, whereas in direct equity or PMS the tax implication is at each sale transaction but the point to note is that while reinvesting the cost of purchase of new transaction increases and the future tax will be on the gains from the new cost of purchase.
We hope you have seen our immediate release post the budget announcement – recaptured below.

Having said so, we analyzed the data of investors in our various PMS strategies in order to ascertain the impact assuming the same was applicable 5 years back. Needless to say, we have to calibrate strategies in order to minimize tax impact if such a development were to take place, but we felt it may be relevant to see the impact with current strategy as is.
Given our Investment Philosophy of “Buy Right : Sit Tight” the effective tax paid annually across strategies is less than 1% of the assets irrespective of time of investment.

Over 5 year investment horizon
We studied the churn in the portfolio, holding period and impact of taxation for an investor invested in our PMS strategies (Value or NTDOP) 5 years back in 2012. The outcome is as below.

Next Trillion Dollar Opportunity Strategy (NTDOP)

An Investor in NTDOP strategy invested in December 2012 with initial investment of Rs. 1 crore, has gained Rs. 3.07 cr and thus value of the portfolio is Rs. 4.07 cr (approx. 25% p.a.) as on December 2017. Over this 5 year period the total churn in the portfolio is average of 20% per annum only which is very low. The period profiles of the transaction in these 5 years in the portfolio suggest that 29% of the transactions have incurred short term capital gain and the tax impact has been only 2.2% in total of the average assets (around 0.44% annually).

Also in the current portfolio holding 74% of the portfolio is held over 3 years and only 26% of the portfolio is less than 1 years holding. This is in line with our Buy and Hold strategy. 

Holding Period

% of portfolio

Less than 1yr


Over 1year


Value Strategy

Similarly for Value strategy, if an Investor invested in December 2012 with initial investment of Rs. 1 crore, has gained approximately Rs. 90 lakhs and thus market value is 1.9cr (approx. 15% p.a.) as on December 2017.

Holding Period

% of portfolio

Less than 1yr


Over 1 year


We have realigned 15% the portfolio in November and December and therefore including that approx. 40% of the portfolio is less than 1 year (as we ideated ICICI Bank, AU small finance bank and Bajaj Finserv). However 40% of the portfolio is still above 3 years holding.  

India Opportunity Portfolio Strategy (IOP)
Given that the IOP Strategy was realigned in Aug 2016, we considered data from August 2016 onwards.
The portfolio has held maximum stocks since realignment of the portfolio and only 23% of the portfolio is less than 1 year 

Holding horizon


Less than 1 year


Over 1 year


Introduction of 10% tax on long term equity gains and keeping 15% tax on short term equity gains

For the NTDOP Strategy if the LTCG of 10% was introduced 5 years back then, the effective incremental tax paid on the average AUM would be 4.19% over a period of 5 years which would be around 0.83% p.a. (Data as on December 31, 2017)
Similarly for Value Strategy the effective incremental tax to be paid on the average AUM would be 2.66% over a period of 5 years which would be around 0.53% p.a. (Data as on December 31, 2017)

Illustration – Tax calculation for NTDOP 

Initial Investment



Current market Value



Average AUM




Sale Value

Cost Value

Capital Gains

STCG @15% & LTCG @10%

% Tax paid on Average AUM

< 1yr






Above 1 year







Illustration – Tax calculation for Value Strategy 

Initial Investment


Current market Value



Average AUM




Sale Value

Cost Value

Capital Gains

STCG @15% & LTCG @0%

% Tax paid on Average AUM

< 1yr






Above 1 year







Disclaimer: The above given information are of a sample client of Strategy(ies) as on December 31, 2017. The above is used to explain the concept and for illustration purpose only and should not be used for development or implementation of an investment strategy. The Stocks mentioned above are used to explain the concept and is for illustration purpose only and should not be used for development or implementation of an investment strategy. It should not be construed as investment advice to any party. The stocks may or may not be part of our portfolio/strategy. Past performance may or may not be sustained in future. It shall not be constitute as an advice, an offer to sell/purchase or as an invitation or solicitation to do so for any securities.  Investment in Securities is subject to market and other risks and there is no assurance or guarantee that the objectives of any of the Strategies of Portfolio Management Services will be achieved. Please read Disclosure Document carefully before investing.

Please note that the above statement is based on budget changes as introduced in Finance Bill 2018 in the parliament and would be subject to provisions of final Finance Act. For individual nature of tax implications, investors are requested to consult their tax advisors before investing. Before acting on this information, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice.

Happy Investing,

Yours sincerely
Aashish P Somaiyaa
Chief Executive Officer

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