Does MWM beat UTI momentum 30 after Tax?
Mutual funds enjoy a non-level playing field.
We all know that DIY investors have their work cut out for them. The tax treatment is unfavorable. If you are interested in capturing the alpha from the Momentum factor all by yourself, it hurts you in 03 ways.
- While your mutual fund investment profits are taxed only once when you square off the position, your momentum portfolio will incur the tax every year.
- While you will pay 15% for your short-term gains in an MWM portfolio, mutual fund holdings will pay 10% if your hold period is more than 1 year.
- The transaction cost of the churn will hurt MWM and not so much in the case of an index.
We get asked this question a lot. With such a huge handicap to start with, Is it even possible to beat the momentum index?
Here is the answer.
Today is 3rd April 2017 and you have 20 lakhs to invest.
Investment 1. You bought UTI Momo worth 10 lakhs in April 2017 (it wasn’t there in 2017 but for sake of comparison) and sold it today.
Investment 2. You bought MWM worth 10 lakhs in April 2017. (Paid 15% tax every year, except loss-making years, carry forward the losses to next year).
Investment 1 is worth 21 lakhs while
Investment 02 is now worth 31 lakhs
This includes everything. transaction costs, slippages, and unfavorable tax treatments.
Also, this data presumes that you will be a STOIC and NOT sell your UTI Momo index in bear markets. (It fell 40+% in corona crash and a whooping 65% in 2008 (not in the table above))
We have spent enough time in the markets to tell you that NOBODY is a STOIC. It is not humanly possible to withstand such drawdowns, not with a meaningful stake at least.
If you want to further reduce your drawdown (MWM has a max DD of 28%), we would suggest you explore MMG. (A 70/30, momo gold portfolio) which has a monthly rebalance reducing the transaction costs further.
Please visit our microsite at smallcase to explore all 03 offerings of MysticWealth (MWV, MWM and MMG)