Trump used direct indexing to save on taxes. What is the strategy, how does it work and should you follow it too?

Direct indexing is an investment strategy where an investor owns individual stocks in their own name, rather than buying shares of a mutual fund or ETF. Instead of buying a single, large basket of shares, the investor can build a portfolio that closely matches a benchmark index, like the Nifty 50 or Sensex. This approach allows for greater control over tax management, as investors can specifically sell shares that have generated capital gains to offset other losses, a process known as tax-loss harvesting.

This strategy matters to investors because it can significantly lower tax liabilities over the long term. By selling underperforming assets to offset profits from winners, the investor reduces the amount of tax they owe to the government. However, it is not a simple or cheap process. It requires active management, higher trading costs, and significant administrative effort. While it offers tax efficiency, it is generally better suited for high-net-worth individuals or those with complex portfolios rather than the average retail investor.

What to watch next is the balance between tax savings and the cost of implementation. As technology makes direct indexing more accessible, more investors may consider it. However, you should evaluate if the potential tax benefits outweigh the higher fees and management time required. It is important to consult a financial advisor to see if this strategy fits your specific financial goals and risk profile.