Let us consider two options
- Buy all stocks in the same ratio of a particular index
- Buy Index fund or ETF
If I go for option 1, I will be eligible for all corporate actions. But, one corporate action which troubles me is dividend. I am not a fan of dividend. I would prefer capital appreciation instead of dividend for the obvious reason that dividend will be taxed at 30 percent. If I just buy an ETF, then the value of dividend gets added to the NAV of the scheme. Ultimately at the time of sale, it will result in capital gain which is at a lower tax rate. Expense ratio of index funds and ETFs is much lower than the tax rate multiplied with dividend yield.
Am I getting this right? Or I am missing out on something?
The reason for this query is I am holding most of the IT and FMCG large caps. And the dividend that I get from these go into 30 percent tax bracket.
So I was planning to sell off individual stocks in the same ratio of its weight in the index. Let me elaborate this.
Lets say I have a total value of FMCG stocks of 10L.
I will buy FMCG ETF of 10L. If HUL takes 30 percent weight, I will sell HUL valuing 3L and so on. If I do that as per my current calculations I wil get able to cover as much at 9L from my current holdings. 1L will be the ones which I am currently not holding and they have negligible weight.
What will I save?
- Dividend yield on fmcg is around 3 percent. Thats 30k. Tax on that is around 9k.
- ETFs have 10 percent haircut on pledge for margin. Stocks have at least 20. All my stocks are pledged. So I will get at least extra margin of 1L. Even if I consider 5 percent return on the same its another 5k per annum.
What are my costs.
- Cost of these trades to be executed one time.
- Expenses of the fund or etf annually.
- Opportunity cost of funds when I have to unpledge the stocks worth 10L and again pledge ETF after 2 days.
I would really appreciate if you guys would give your analysis on this.