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Budgeting Beyond the Fest

Budget’s impact on your equity fund investment will depend on its ability to stimulate and manage growth

There are many festivals in our country which come with shopping of some kind as part of the package. People buy new clothes on Diwali and Eid and they buy utensils on Dhan Teras. There’s also Akshay Tritiya when people are supposed to buy gold, even though in North India this one seems to be a recent invention by gold sellers. In very much the same vein, the Union Budget appears to be a festival when people are supposed to buy stocks.

At least that’s what it looks like if the business media is anything to go by: ‘20 stocks for B-Day’, ‘Railway Stocks to Watch Today’, and ‘Your Budget Portfolio’, are some of the headlines that I’ve come across over the last few days. Each one seems to pitch some story on a sector that is bound to benefit from the budget and then draws up a more-or-less arbitrary list of companies that fit the alleged projections.

And of course, the flavour of the day is infrastructure. Luckily or unluckily, this is a deliciously vague term and depending on the agenda of the story because a huge swathe of India’s business landscape can be defined as infrastructure. The result is there for all to see. A large number of equities have run up beyond all rational limits and are thus set up for a post-budget disappointment. Anyhow, that’s about par for the course for equity investors. Thankfully, we mutual fund investors are immune to these pre-budget fevers. I’ve seen plenty of people asking around what stocks to buy for the budget, but no one’s asking about what mutual funds to buy for budget day.

The Union Budget’s significance for investors goes way beyond considerations of which stock will run up or down on budget day. In the long run, the budget’s ability to stimulate and manage growth will have a far greater impact on the fate of your equity or equity fund investments than short-term movements can possibly have. There’s almost no way that an individual small investor can reliably predict and profit from the impact the budget will have on investments on that day itself. That’s not to say that the budget can’t bring about a sudden change in the investing environment. Regulatory changes that impact investments can cause a sudden readjustment of your investment plans.

Tax changes are a prime example. For example, nothing has changed investors’ perspective on long-term equity and equity fund investing in the last few years as much as the exemption of long-term capital-gains tax on these investments. This year, one area of heavy speculation has been tax-breaks on infrastructure investments. There are all sorts of rumours floating around. Some of them go as far as to claim that there will be a whole new class of tax-exemptions, similar and in addition to the 80C exemption that will be focused on channelling household savings into a new class of infrastructure funds. If something like this happens, then the budget will certainly require a rethinking of your personal investment plan.

One overdue adjustment is an enhancement of the 80C limit of Rs 1 lakh itself. The real reform that is needed is to link this (and other tax-level limits) to an inflation index. Rs 1 lakh is worth a great deal less since the time it was set as the tax-exempt limit. Most middle-class Indians’ long-term savings are entirely driven by this tax-exempt limit and to keep it fixed at a given level for years on end means that the real savings go down.