With the end of 2018 approaching, it's time for income earners to review their tax-saving strategy to ensure that they maximise returns when tax filing season starts early next year.
Tax-saving investments are a good option for individual taxpayers because they not only lower tax bills but also generate tax-free income. Long-term equity funds (LTFs) have become the most popular investment channel for tax-efficient returns.
To enjoy such tax benefits, salaried and non-salaried earners must ensure that they understand and are qualified for the tax-advantaged investments. These investments can be a headache if conditions are not met.
Taxpayers can deduct contributions to LTFs worth up to 500,000 baht each tax year, but no more than 15% of annual assessable income, whichever is lower. The lock-up period for investment in LTFs is at least seven calendar years. This means LTF unit holders can own the funds for slightly more than five full calendar years, buying the units as a year-end approaches and redeeming them early in the seventh year.
How to pick LTFs
The most popular question from taxpayers interested in LTFs is which fund to pick, as there are more than 80 LTFs offered by dozens of asset management companies.
Even though all LTFs have a policy to invest in equity, which is considered a risk asset, taxpayers can choose the degree of risk to match their risk appetite. There are two levels of investment risk for LTFs.
Those who are risk-averse investors or are close to retirement can invest in LTFs with a policy allowing up to 70% of net asset value (NAV) as equity, with debt instruments or deposits making up 30%. Such LTFs always use LTF 70/30 in their names.
Income earners who can tolerate higher risk for a better return can invest in LTFs with at least 90% of NAV in equity.
Apart from asset class, LTFs can also be classified by the market size of the stocks they invest in: large cap, mid cap and small cap.
Chatrapee Tantixalerm, chief executive of Talis Asset Management, recommends investors take fund managers' investment style into account.
"To pinpoint which LTFs are suitable for their investment, investors should consider the investment style of the fund managers, as we often found funds with the same investment policy but different investment styles offer different returns," he said.
Despite the wild swings of the stock market, long-term investment in equity remains attractive, with the Stock Exchange of Thailand's return for 40 years averaging 12.5% per year and for five years averaging 15%, Mr Chatrapee said.
The local equity outlook for the next seven years is still promising based on next year's general election, state investment in big-ticket infrastructure projects and the government's investment flagship Eastern Economic Corridor (EEC), he said.
Veera Vutthikongsirigool, first senior executive vice-president at Krungthai Asset Management, said income earners can choose any LTF if they merely want to reduce income tax bills, but LTFs with a policy of investing in stocks featured in the SET50 index are recommended for those who are also focused on return.
Even though most LTFs with an investment policy in large-cap stocks have lost over the past three years because of persistent fund outflows from the Thai bourse, such flows are expected to reverse over the next few years, which should benefit large-cap stocks, he said.
Top 10 LTFs
Although past performance is no guarantee of future results, it can give some guidelines for investors.
As of August, the top five LTFs for seven years were Good Corporate Governance LTF (CG-LTF) at 13.32%, Value Plus-Div LTF (VALUE-D LTF) at 12.25%, 1 A.M. Selective Growth Long Term Equity (1-SG LTF) at 12.06%, Phatra Long Term Equity Dividend (PHATRA LTFD) at 12.05% and Manulife Strength-Core Long-Term Equity (MS-CORE LTF) at 11.65%, according to Morningstar.
Sixth was UOB Long Term Equity (UOB LTF) at 11.6%, followed by Bualuang Long Term Equity (B-LTF) at 11.15%, Phillip Long Term Equity (P-LTF) at 11.11%, MFC Value Long Term Equity (MV-LTF) at 10.77% and CIMB-Principle LIFE Long Term Equity (CIMB-PRINCIPLE LTF) at 10.73%.
The top five LTFs by one-year performance were UOBLTF at 17.84%, LH Smart Long Term Equity (LHSMART-LTF) at 17.82%, LH Active Long Term Equity A (LHACTLTF-A) at 17.24%, LH Active Long Term Equity D (LHACTLTF-D) at 17.16%, and TISCO Long Term Equity B (TISCOLTF-B) at 15.28%.
Sixth was TISCO Long Term Equity A (TISCOLTF-A) at 14.67%, followed by TISCO Dividend Long Term Equity (TDLTF) at 14.51%, Jumbo 25 Long Term Equity (JB25 LTF) at 14.5%, SCB Stock Plus Long Term Equity (SCBLT2) at 12.91%, and SCB MAI Stock Long Term Equity (SCBLT3) at 12.68%.
Suitable investment time
Siriporn Sinacharoen, managing director of Krungsri Asset Management, said it's not too late for taxpayers to snap up LTF units in the current quarter, but they should avoid doing so on the final day of the year because there is always a large investment volume for tax-saving funds on that day.
Historically, the NAV for LTFs and retirement mutual funds (RMFs) on the final business day of the year is always higher because it is the busiest day of the year for such tax-saving investment, Ms Siriporn said.
"Investors should understand the characteristics, terms and conditions, returns, and risks of these funds before investing, as well as studying the tax incentives listed in the prospectus," she said.
Mr Veera said dollar cost averaging is a good investment strategy for LTFs: i.e., buying a fixed amount of a particular investment on a regular schedule, regardless of price, which lets investors better manage cost than buying a large chunk at one time, particularly at the end of the year.
LTFs or RMFs?
Both LTFs and RMFs are tax savers, but taxpayers typically consider LTFs to be more attractive investment choices because the lock-in period is shorter and LTFs don't require continuous investment until retirement, unlike the latter.
Finance Ministry regulations let taxpayers take a contribution break from RMFs of no more than one consecutive year, and at least 5,000 baht is required for the investment.
RMFs are allowed to be redeemed when holders turn 55, but the money must be locked in the fund for at least five calendar years. Investors will be subject to a tax liability if RMFs are redeemed before the holder turns 55 or if the fund's units are held for less than five years.
Given the more diversified portfolio, spanning equities to bonds to gold, RMFs can be an asset class that better suits investors than LTFs. If money is not an issue, taxpayers should contribute to both LTFs and RMFs.
Taxpayers can deduct up to 15% of their taxable income or 500,000 baht (whichever is lower) from investment RMFs. But the investment cap for RMFs must include contributions to provident or pension funds and pension life insurance premiums.
Other tips
The old chestnut "don't put all your eggs in one basket" holds true for LTF investment, as those who invest in only one fund have a greater chance of suffering big losses if the market goes into a tailspin, losing the opportunity to receive a higher return if other funds perform better.
Maximum drawdown, the loss from the peak to the trough of a portfolio over a specified period, should be taken into account; funds with low maximum drawdown have shown less volatility during market slumps.
The fund management fee should always be considered, as a higher fee means higher investment cost and a lower return. Mr Veera said funds that track a market index always charge a lower management fee than active funds.
Dividend-paying LTFs and RMFs are suitable for those who want to get some money back during the lock-in period, but they face a 10% withholding tax on dividends.
Tax-saving funds that don't pay dividends will see the entire contribution distributed tax-free when redeemed.
Workers from an asset management firm provide details about a mutual fund to customers at the Mutual Fund Fair. PHRAKRIT JUNTAWONG