Will a change in Long Term Capital Gains exemption dampen investor sentiment?

There is talk that the FY19 Budget may increase the holding period from one year to three years

Published 6 years ago on Jan 25, 2018 1 minute Read

IV Subramaniam, CIO, Quantum Mutual Fund

While the government will be the net-beneficiary of this increase in tenure from one year to three years, the market will react negatively. The bigger reaction, probably, will be in the mid-cap and the small-cap space, and that would be because of their higher amenability to speculation in comparison with large-cap stocks. The mid-cap and small-cap space have witnessed a stellar run over the past one year and have outperformed the large-cap indices. The recent influx of short-term flows into small and mid-cap stocks will be disrupted and it will also require a realignment of the internal rate of return equation on the part of investors. The acceptance of this change warrants an underlying change in the thought-process of investors and that, by its very nature, will be a slow process. Thus, the change will upset a number of stakeholders.

Nilesh Shah, managing director, Kotak AMC

If the tenure of the Long Term Capital Gains exemption is increased from one year to three years, it will affect sentiment temporarily but there won’t be a long-term impact on the market. There might be a small correction in the aftermath of the implementation, but the market will quickly bounce back from there. People will accept this change as in the past, the long-term capital gains tax break has led to better participation in the equity market. We did see a one-year to three-year increase in debt mutual funds earlier and investors adapted to it. Most investors do not have a one-year horizon in mind when they invest in equity. Even retail investors now have a longer-term horizon, so the change from one to three years will not have a material impact.