In over 300 small stocks, daily average volumes up between 500% and 50,000% in March

Many investors churned their portfolios in mid and small-cap stocks since the beginning of March in order to trim the capital gains tax ahead of the financial year-end. Though this is a fairly routine exercise every March, this time the rush to book losses was more than the previous years due to a big rally in the stock market since the beginning of the current financial year.

In over 300 stocks with a market capitalisation of less than ` . 1,000 crore, daily average volumes have shot up between 500% and 50,000% in March, indicating the rush to book losses for tax adjustment despite stringent action by the market regulator Sebi against many such companies in recent months.

Sensex has risen almost 26% since the beginning of the financial year, while the BSE mid and small-cap indices have surged 48% and 51%, respectively.

Due to a sharp rise in several mid and small-cap stocks this financial year, investors are readjusting their portfolios to meet the available tax benefits. However, given the fact that liquidity in most small-caps is relatively low, investors should be careful of a high impact cost as it will add to the transaction cost

Booking losses is not restricted to small cap stocks alone, many investors who made huge profits in the current financial year, sold some of the mid-caps from their portfolios, which corrected recently, said experts.

We have recommended our clients who have booked profits during the rally to sell those mid-caps which have fallen recently and buy them in the first week of April to adjust the short-term capital gain tax.

If investments are less than a year old, an investor can book a loss on shares and lower his tax liabilities, tax experts said. This loss can be offset by the short-term capital gains made during the year.

If an investor has invested in a stock less than one year ago, it can be sold to adjust the short-term capital gains tax if he is incurring loss on the stock. If the holding is more than one year, loss incurred on sale of such security becomes long-term capital loss, which can't be offset against a short-term capital gain.

These losses can also be offset against short-term and long-term gains of non-equity assets, like real estate, debt mutual fund units, gold exchange traded funds, etc. However, long-term capital losses on assets that are subject to securities transaction tax, can't be offset against any income, and can't be carried forward for offsetting against any future gains.