Long-term equity funds can reduce your income tax.
The Nation – 13 November 2008
THALIT CHOKTIPPATTANA IS EQUITY FUND MANAGER AT AYUDHYA FUND MANAGEMENT.
With the end of the year approaching, our marketing officers are receiving numerous phone calls about taxsaving longterm equity funds (LTFs). My advice? Buy into them up to the maximum limit.
In a nutshell, the amount you invest in LTFs can be deducted from your annual taxable income, so your income tax will be less. The catch is the holding period of the fund is five calendar years before any redemption can be made. Yes, your investment will be locked up in the volatile equity market for the next five years. Therefore, the question is whether the tax saving will be large enough to cover the potential loss (if any) from the equity investment.
Simple maths shows the amount of tax saved is roughly x per cent of the LTF investment, where x per cent is your incometax bracket. This means your investment can take a loss of up to x per cent before you lose out on the deal. This equates to having xpercent downside protection to your equity investment. For example, if you are in the 20percent incometax bracket, investing in an LTF worth Bt200,000 will reduce your income tax by roughly Bt40,000. Is this Bt40,000 large enough to cover a potential loss five years down the road?
To me, any free downฌside protection to an investment trading at the present fairmarket price is appealing enough already. Moreover, we should not be disฌtracted by this year's extraordinary index free fall; the fact is annual longterm equity growth remains 1015 per cent. A five-year LTF investment plan surely seems longterm enough.
Discerning investors simply wanting to lock in the taxsaving benefit without having to risk capital in the volatile equity market can do so with some extra effort.
Buy into LTFs that track the Stock Exchange of Thailand (SET) 50 and hedge the investment by shorting either the Thai DEX SET 50 ETF or SET 50 Futures at your desired exposure. This way, any loss in your LTF investment will be offset by gains on the short position, and the payoff will be the taxsaving benefit minus some commissions.
While I would never consider this path myself, due to my personal equityorientฌed nature, different people will be of different minds. The goal is to save on taxes, is it not?
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