Indian stock markets like the global markets had a fantastic run in 2017. The Sensex generated returns of almost 26 per cent, which is generally unheard of in markets. In 2018, the Sensex is now down almost 9 per cent. Let us see why it is time to sell shares and move money into debt.
Long term capital gains tax from April 1, 2018
Long term capital gains tax will attract a tax of 10 per cent from April 1, 2018, even without indexation. In an asset like real estate, if you sell at a profit, at least you have indexation benefit that comes in.
In case of shares it does not matter whether you hold for 1, 2, 3 or 15 years. You end-up paying 10 per cent tax without indexation.
Now, the returns from shares were good to hold for long term, because of no capital gains tax. From April 1, 2018, 10 per cent of the profits earned would be taxed, which means you need to make higher profits.
Interest rates are rising
The 10-year G-Sec rose from 6.41 per cent at the end of July to 7.65 currently. This is not good news for stock market investors. Several banks like SBI have already hiked their interest rates.
The interest rate increase cycle has just begun and you can now get decent yields, unlike a year before.
A state government company like KTDFC, offers you an interest rate of 8.25 per cent with monthly compounding, which takes your yield to as high as 10 per cent on a longer term tenure.
That too without risk and assured returns, unlike shares where even protecting your capital may not be easy.
While until last year it almost seemed certain that the Narendra Modi government would return to power in 2019, things look a little uncertain at the moment.
As we write, the NDA ally, the TDP has pulled out of the NDA, the Shiv Sena another NDA ally is taunting the government and JDU is making fresh demands for special status for Bihar. The SP has won the bye-polls in Phulpur and in Yogi Adityanath's pocket borough of Gorakhphur parliamentary constituency.
The Congress one all the by-polls in Rajasthan. Though there were huge gains made by the BJP in the North East, much would depend on performance in big states like Karnataka, Madhya Pradesh and Rajasthan scheduled for later this year.
Uncertain developments abroad
Donald Trump levied trade tariffs and uncertain developments may keep global markets volatile. Even if you move money now from equity to debt, you may definitely get an opportunity to buy at lower levels. In fact, the only way you are going to make money is through buying stocks low. At 22.90 time p/e of the trailing Sensex EPS the markets are not cheap and way above the long term average of 17 times.
You are likely to get stocks lower than the current index of 33,300 points in the Sensex.