Investment decisions can be taken based on tax implications. There is a natural tendency among investors to be drawn to investments where they feel taxes are lower. When the tax concessions are withdrawn for certain investments, they tend to look less attractive to investors.
Taxation is as much a driver of investment decisions as investment merits are. In fact, investors often view investment merits primarily from the implications of taxation. Taxation tends to bias investment decisions far more than we think they do. We tend to be over-influenced by tax implications, but investment merits should always be given greater importance while making investment decisions.
Investment merits matter more than tax considerations. If strong investment merits are seen, then the performance from that investment could be far superior to an investment that is chosen purely on tax considerations. When the performance of an investment can be improved significantly by carefully weighing the merits, an investor must not fail to capture those merits in his investment choices. The investor must keep the tax considerations at the back of his mind and put the investment merits at the top of his decision-making framework.
In the recently passed budget, the government has changed taxation on debt mutual funds. This will certainly change the tax outflows for several investors. It will be very tempting to change the investment approach under such circumstances. While investors should certainly factor these tax changes into their decision-making, they should carefully weigh their pros and cons while they arrive at their financial decisions.
Choices made should now allow investment merits to deliver superior investment performance as tax advantages no longer exist in debt investing. Choices must be curated far more carefully, and investors must be very diligent in making their investment decisions. Risk management should be done in a more organized and cautious manner. When tax advantages go away, the investor must be careful with his investing.