LTCG Brings Selling Pressure To The Markets

Our markets have been waiting for a correction since long. The market is scaling peaks since April 2017 on the back of two truths –

  1. The strong flow of retail money coming into the markets
  2. Government intervention in every possible way to keep the positive mood in the market.

Now the much awaited Long-Term Capital Gains Tax (LTCG) coming back at 10% has triggered the sell buttons. In one way it is a sign of relief. Investors were haunted by fears that a correction will take away weak hands in the market and move out weaker stocks from managed portfolios. It is required once in a while to cleanse portfolios too. Like servicing our vehicles after periods of use, a review and cleaning help to put things in a condition to move on further.

The reaction to the LTCG tax is disturbing. The proposal to grandfather gains made till 31st Jan 2017 and tax the income from there off has driven many to think of immediately selling their long-term holdings before 31st March 2018 to claim tax exemption and then re-invest. These are actions that mature fund managers or fund houses would not take because they know that there is no benefit, and only adds more accounting effort.

Retail investors, thinking that they are smart, are going ahead with selling their holdings. Most of the times, after they sell, prices will drop further, and they will get comfortable with their decision, deciding to wait and get in at a better price later. Why they want to buy again? The stocks they hold are good ones, so they want to be invested. Only that, they do not want to pay tax on the gains.

The savings will be 10% of whatever gains they have made so far. While what will happen later is that, in the bargain to time the market, they will miss the next move and probably not buy again or take entry at higher levels. In both ways, they will only end up losing more, leaving the government and brokers with more income. And all these efforts are only possible for the next two months, after that, markets are going to be there, and there will be profits to be made, on which taxes must be paid.

Such kind of immature moves are the reasons why retail investors are always losers and professionals are consistently gainers.