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The Weekly Wrap | Churning Your Portfolio Can Be Tax-Smart

Priyanka Sharma
Weekly wrap kuvera

🏁 TL;DR

If equity long-term capital gains (LTCG) tax rates are expected to go up, selling and re-buying your equity investments annually to lock in today’s lower LTCG rate is a smart strategy.

 

Beating Rising LTCG Rates With A Smart Strategy

 

India’s equity investors are staring at a changing tax landscape. With long-term capital gains (LTCG) tax on listed equity already reintroduced in 2018 after a long holiday, whispers of future hikes—from the current 12.5 to 20% or even 25%—are no longer just speculation. 7 out of 10 smart investors I speak to expect this to happen in the next 5 to 10 years.

The conventional wisdom says: Buy & hold, avoid churning your portfolio to minimise tax drag, and let compounding do its magic.

But what if I told you: Regularly churning your portfolio—selling and re-buying your investments annually to lock in today’s lower LTCG rates—isn’t a tax inefficiency, but actually a smart, forward-looking feature if you expect LTCG tax rates to go up.

Let’s look at an example.

 

Under current Indian tax laws:

Say the government raises the LTCG rate to 20% effective 5 years from now. This move may come as part of broader fiscal reforms, or due to global trends harmonizing capital and income tax treatments.

 

This brings us to an important question:

Should you continue with a buy-and-hold strategy and pay 20% LTCG at the end, or should you start locking in gains annually at the current 12.5% rate?

Let’s illustrate the impact of both strategies using an example.

 

We’ll compare two strategies:

 

📈 Strategy A: Buy & Hold

Let your ₹100 compound at 12% for 5 years:

FV = 100*(1 + 0.12)^5 = ₹176.23
Gain = ₹76.23
Tax (20% of ₹76.23) = ₹15.25

Post Tax Amount After 5 Years = ₹160.99

🔁 Strategy B: Annual Churn

Sell and repurchase annually, paying 12.5% LTCG on yearly gains:

Post Tax Amount After 5 Years: ₹164.74

 

Annual churning beats buy-and-hold by ₹3.75 on ₹100 investment, or 3.75% more on invested capital. Scale it to a ₹10 lakh portfolio, and the difference becomes ₹37,500 in 5 years.

What if the LTCG goes to 25%?
Let’s re-run our calculation for an even more adverse scenario: LTCG becomes 25% in year 5.

Delta: ₹7.57 or on ₹10 lakh, that’s ₹75,700 of additional returns in your pocket.

By churning annually, you crystallize and pay taxes on smaller gains, but at a lower tax rate. As opposed to compounding gains and then paying a higher rate on the entire amount later.

In a buy-and-hold scenario, you’re exposed to future tax hikes. You’re taking on a potential risk that could be eliminated. Annual churning locks in the LTCG benefit under current laws, acting as a hedge against future fiscal surprises. Of course, if you believe LTCG tax rates are going to stay put or even decrease, you should not be doing this at all.

 

When the facts change, I change my mind – what do you do, sir?

: John Maynard Keynes

 

Implementing the Strategy in Practice

 

If you expect LTCG tax rates to go up then locking in today’s lower LTCG rates isn’t gaming the system—it’s good financial hygiene. With a little effort, you could preserve more of your wealth and compound smarter.

 

Twice Bitten, Ain’t Shy

 

Why everything that’s ‘posed to be bad make me feel so good?

Everything they told me not to is exactly what I would

Man, I tried to stop, man, I tried the best I could

But you make me smile

 

The American rapper Kanye West—or Ye Ye, as he renamed himself again last month—is hardly the go-to person if you want to learn anything about, well, almost anything. But the starting lines of his 2005 song ‘Addiction’ remind us of what many men and women in India have been doing for the past few years, even when they are told not to do it.

 

No, we aren’t talking about drugs or alcohol or binge-watching Netflix or fantasy-gaming on Dream11. We are talking about something equally addictive—futures and options trading. 

 

 

Readers of this weekly newsletter may remember that we have been writing about this addiction for over a year; first in May last year and then again in October. And we have been urging investors, especially young people who got hooked on to F&O trading in the post-pandemic bull run, to be more careful.

 

But it can be difficult to kick the habit, and data the Securities and Exchange Board of India released this week shows just that.

 

Individual investors, dabbling in the high-octane world of equity derivatives, got hammered again in FY25, with their net losses ballooning 41% from FY24 to a staggering Rs 1.05 trillion, or $12 billion. That money came out of the pockets of 96 lakh traders, a stunning 91% of whom ended the year in the red. On average, each retail trader lost around Rs 1.1 lakh.

 

What’s more troubling is that the number of people jumping into the F&O frenzy—fueled by advertisements, YouTube influencers, and expiry-day adrenaline—kept rising despite repeated warnings from SEBI and the government.

 

The high losses are even more concerning in the wake of SEBI’s ban on US trading firm Jane Street for engaging in manipulative market practices that helped it to make more than Rs 43,000 crore in profits from options trading. 

 

Jane Street, of course, claims it did nothing wrong and that what it did was just arbitrage trading. And it will likely challenge the ban. Still, it’s difficult to ignore the fact that one company alone made such massive profits while millions of individuals made heavy losses.

 

So, when will retail traders learn their lesson? That we can’t say, but there may be some movement in the right direction.

 

SEBI data showed that retail traders lost Rs 21,255 crore in Q1 of FY25, Rs 25,942 crore in Q2 and Rs 33,661 crore in Q3.

 

But starting late November 2024, SEBI rolled out a series of measures to cool the speculative frenzy—higher contract sizes, tighter intraday limits, and upfront premium collection, to name a few. The message was clear: this isn’t a casino.

 

Did it work? To a degree. Losses in Q4 dropped 26% from Q3 to Rs 24,745 crore. The number of retail participants shrank to 42.7 lakh in Q4 from 61.4 lakh in Q1—a 30% drop that speaks volumes. People either wised up or tapped out. 

 

Even the average loss per trader fell in Q4—to Rs 57,920 from Rs 62,975 in Q3. The percentage of loss-makers also declined, from 88.5% to 86.4%.

 

The Q4 data offers a sliver of hope that the worst may be behind us, if the reforms continue and if retail investors start trading with more awareness and less blind ambition.

 

For now, the lesson from FY25 is sobering: the market rewards patience, not thrill-seeking. And when nearly nine in ten traders are losing money, it’s time to rethink what “playing the market” really means. 

 

Bouncing Back

 

While millions of individuals are burning money in F&O, millions more are steadily investing in mutual funds even though they keep adjusting their strategies and preferences depending on market movements. 

 

Latest data released this week by the Association of Mutual Funds in India showed inflows into equity mutual funds surged 24% to Rs 23,587 crore in June, ending a five-month decline thanks to strong retail participation. Overall, the mutual fund industry touched a new peak in June, with net assets under management rising to Rs 74.41 trillion.

 

Inflows into large-cap equity schemes soared 36% monthly jump to Rs 1,694 crore while the amount of money flowing into small-cap and mid-cap funds rose 25% and 34%, respectively, the AMFI data showed. This helped the benchmark Nifty 50 gain 3% in June, while the mid-caps climbed 4% and the small-caps jumped 6.7%.

 

Contributions via systematic investment plans (SIPs) also hit a new record of Rs 27,269 crore in June while the number of SIP accounts increased to 86.4 million from 85.6 million in May.

 

One of the highlights during June was investors pouring more money in gold and silver funds amid rising global trade uncertainty that have pushed prices of precious metals higher.

 

Inflows into gold exchange-traded funds soared 10 times month-on-month to Rs 2,081 crore in June while inflows into silver ETFs more than doubled to Rs 2,004 crore from Rs 853 crore in May.

 

Enter the Dragon

 

Staying with mutual fund news, the industry this week saw the big-bang entry of a player who may well change its entire dynamics in coming months and years. That player is Jio BlackRock Asset Management. 

 

The fund house is a joint venture between Jio Financial Services, a unit of India’s biggest company and billionaire Mukesh Ambani-led Reliance Industries, and BlackRock, the world’s biggest asset manager.

 

The fund house said this week it raised Rs 17,800 crore across three debt schemes—an overnight fund, a liquid fund, and a money market fund—via new fund offers. These are its first set of schemes since securing SEBI approval in May. 

 

The company also said that 90 institutional investors and 67,000 retail investors have invested in these funds so far, underlining its wide reach and brand awareness in such a short period.

 

Now, why are we saying that Jio BlackRock can perhaps change the industry dynamics? Well, because Ambani has a history of doing so. Remember the 2016 launch of Reliance Jio Infocomm, the group’s telecom venture? 

 

Thanks to his deep pockets, Ambani launched the telecom company offering cheap phones and free data and calls. Overnight, thousands of customers joined up. Within months, many of Jio’s competitors shut shop. Some telecom operators merged with each other (think Idea and Vodafone) and some others were absorbed by Bharti Airtel. 

 

Today, Jio is the largest telecom company in India, followed by Airtel. Vodafone Idea, and state-run BSNL and MTNL are barely surviving. Ambani can follow a similar playback for the mutual fund business. He would focus on small-ticket investments to rope in thousands of investors. And he would launch multiple equity and debt funds to rock the competition. And he would keep costs low—that means bypassing distributors and offering only direct plans.

 

Jio BlackRock can use Reliance Jio’s large digital network to bypass distributors that other fund houses use. That way the company can offer funds directly to institutional and retail investors. It can also tap into the customer base and network of Jio Financial, which demerged from Reliance Industries two years ago and commands a market value of Rs 2.1 trillion.

 

Equally importantly, the fund house will tap into BlackRock’s expertise. BlackRock, which manages $11.6 trillion, can offer its famed investment and risk management system called Aladdin to help its India JV to go one up on its competition.

 

All in all, India’s mutual fund industry, which now has nearly four dozen companies, is bracing for some disruption.

 

Hitting a Wall

 

Moving on to corporate developments, two companies were in the crosshairs with shareholders and investors this week.

 

Mining giant Vedanta Ltd, led by billionaire Anil Agarwal, faced an attack by US-based short-seller Viceroy Research. In an 87-page report, Viceroy said Mumbai-listed Vedanta’s UK-based parent Vedanta Resources Plc was “systematically draining” the Indian unit and that it had taken a short position against the debt of the British parent.

 

Viceroy said that Vedanta’s group structure was “financially unsustainable” and a risk to creditors. It said it had uncovered material discrepancies in its investigation. It also said that Vedanta Ltd’s dividend policy serves its parent company’s requirements, not its own cash flow.

 

Vedanta, which plans to split into four to five separate listed entities as part of a reorganization, dismissed the report. The group said the report was “a malicious combination of selective misinformation and baseless allegations”. Still, shares of Vedanta and Hindustan Zinc fell almost 5% after the report. 

 

The second company was Zee Entertainment Enterprises, whose shareholders rejected a proposal by the founding family of media baron Subhash Chandra and his son Punit Goenka to raise their stake by injecting funds via warrants.

 

The proposal involved the company issuing 16.95 crore preferential warrants for Rs 2,237 crore to the promoter family. This would have increased the promoter shareholding to increase from just 3.99% currently to 18.39%. The proposal required approval from at least 75% of shareholders but only 59.5% of the shareholders who voted supported it.

 

The rejection came after proxy advisory firms InGovern and Institutional Investor Advisory Services recommended voting against the proposal due to concerns about stake dilution. Currently, retail investors hold a 41.68% stake in Zee while institutions such as HDFC Mutual Fund, ICICI Prudential Mutual Fund, LIC and Vanguard own nearly 39%.

 

Market Wrap

 

India’s stock markets fell for a second consecutive week on renewed worries over US trade tariffs and as Tata Consultancy Services, the nation’s biggest software services exporter, disappointed with its quarterly earnings.

 

The BSE Sensex lost 1.12% this week while the Nifty 50 slipped 1.22%; both had declined 0.7% last week.

 

The mid-cap index dropped 1.7% while the small-cap index shed 1.4%. Among sectoral indices, all but two of the 13 ended in the red—only the FMCG and pharma indices stayed in the green.

 

Market breadth was negative with 35 of the 50 Nifty stocks and 20 of the 30 Sensex companies falling this week.

 

IT stocks were among the biggest losers after TCS missed revenue forecasts for Q1. HCL Tech dropped 5%, TCS lost nearly 4.5% and Wipro shed 4%. Tech Mahindra and Infosys also declined. 

 

Overall, Titan was the top Nifty loser this week, falling more than 8.5%. Apollo Hospitals, Bharti Airtel, Bajaj Auto, Bharat Electronics and Hindalco were the other prominent names that slipped.

 

Gainers were led by Hindustan Unilever, which ended the week with a gain of 7.7% and jumped 4.6% on Friday after the company named insider Priya Nair its new CEO.

 

Kotak Mahindra Bank, state-run companies NTPC and Power Grid Corp, and SBI Life were the other major winners.

 

 

Other headlines

 

That’s all for this week. Until next week, happy investing!

 

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

 

Watch here: Investing in International Markets

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