Given the Israel – Palestine conflict started in early October, we at FinAtoZ would like to present our analysis of the situation and whether it warrants any changes in your current investment portfolio.

As of now, inflation continues to be high globally. With this escalation, the crude oil price will likely remain elevated. Higher crude oil prices would not allow inflation to cool, so the interest rates will likely remain elevated for longer. High-quality and large companies are relatively better equipped to manoeuvre a high-interest rate cycle. Companies of smaller size find the going tough in such a business cycle since the cost of funding becomes relatively costlier, impacting their margins.

We have seen two days of market performance after this conflict broke out over the weekend. The markets are flat, which means that they are not expecting this conflict to acquire gigantic proportions. In fact, markets look to be treating this almost as a non-event since the Israel—Palestine conflict is not very surprising news for the market.

Though the markets seem stable at the moment, the risk-reward ratio has become slightly skewed due to this geopolitical event. After the recent run-up, current valuations of mid and small-cap segments seem to be elevated. With interest rates likely to remain elevated, reducing the allocation to mid and small caps seems prudent.

We evaluated the investment portfolios in the October quarter with help from the analyst team. Our advisors have already informed and rebalanced our clients' mid-small-cap portfolios, where the current allocation in small and mid-caps has become higher than what should be ideally there as per the risk profile. While rebalancing your portfolio, we also consider the tax liability and exit load.

Taxation on Debt Mutual Funds After 1st April 2023 –

With the recent amendment to the Finance Bill 2023, the indexation benefit on debt mutual funds has been scrapped, meaning that long-term capital gains (LTCG) from debt mutual funds will now be taxed at the investor's applicable slab rates.

Consequently, the specified mutual fund will no longer receive indexation benefits when computing LTCG, making debt mutual funds subject to higher taxes based on individual income brackets.

Furthermore, this change also affects other mutual funds such as gold funds, hybrid funds, international equity funds, and funds of funds (FOF). These funds will also not receive indexation benefits for LTCG, potentially reducing their attractiveness as investment options due to the increased tax burden on profits.

New Addition to the Mutual Fund Category –

With the amendment of the finance bill, pure debt MFs are no longer attractive to investors due to taxation. As a result, to maintain asset allocation and provide more tax-efficient investment options, we have introduced Equity Savings Schemes to our fund's bucket.

According to SEBI regulations, Equity Savings Schemes must have at least 65% of their investments in equities and a minimum of 10% in debt holdings. These funds can invest in a mix of equity and equity-related instruments, debt securities, and arbitrage securities through hedging strategies.

Since these funds' exposure is spread across both equity and debt instruments, diversity is maintained, making them more resilient to market ups and downs than pure equities.

Taxation - Equity Savings Schemes are treated as equity assets for tax purposes, offering a more tax-efficient option than pure debt funds. This makes equity savings schemes an attractive alternative for investors to optimize their tax liabilities while maintaining a balanced investment portfolio.

Along with the changes in the debt category, we have also altered one of our flexi cap funds. After the fund manager in that fund was changed, we evaluated it for two consecutive quarters. However, the new fund manager could not keep up with the performance of its peers and the category average, so it was replaced with another fund in the same category.

Hurray!!! Achieving New Milestone as A SEBI Registered RIA:

We are thrilled to announce a significant milestone in our journey together – our Assets Under Management (AUM) have now crossed ₹500 Crore, and we proudly serve over 500+ families at present.

This achievement would not have been possible without your trust and support. We are deeply grateful for your confidence in us to manage your investments and help you achieve your financial goals. Your continued partnership inspires us to strive for excellence in every aspect of our service.

Thank you for being an integral part of our success. We look forward to continuing this journey together and achieving even greater heights.