On the day of the Union Budget, in the hours after the Budget speech was over, I was engaged in a very interesting exercise in estimating its impact on various mutual funds. Value Research was conducting this exercise for a newspaper and you must have seen the results in the shape of a full-page feature on Friday the 27th. The idea was to select a representative sample of funds from across different categories which would be impacted by the Budget. When the Budget came out, the process turned out to be more complex than we had estimated it would. It wasn't as if the Budget would not have any impact on any funds - far from it. The stock markets certainly didn't think so, and nor did the bond markets.
What made the exercise more complex than I'd expected was the selection of a set of mutual funds that would be impacted more than others. The slope of the impact wasn't flat, but it was very broad. To my mind, this reveals something about about how the budget process has evolved; and most importantly, about the process of choosing good mutual fund investments.
The time when the Budget could make or break individual companies or whole sectors of the economy are long gone. There were companies that will be found to have done better as a result of something that the Budget did and there would be mutual funds that would do better. But these would not be a direct impact of something Mr. Pranab Mukherjee said. The Budget would create conditions that some businesses would be able to exploit better than others. Similarly, there would be some investment managers who would understand these differentials better than others and thereby make more money, but that is a secondary impact. There would be other business leaders and investment managers who would take the same inputs and not be able to create the same outputs.
What I'm saying is that basically, there is no longer a budget impact, rather it is derived from businesses which use the new conditions created to make one. This leaves the investors in an interesting position. There is a type of investing where the impact of the budget needs to be understood instantly, but that's the type that involves making a trade at 11:30 a.m. and reversing it at 3 p.m. However, investing is not even the right word to use for that activity.
On a more tempered time-scale, especially for mutual fund investors, benefiting from the impact of the budget - this Budget, or any other - is more about sticking to the same core values that one would go by anyway. Sensible and goal-oriented mutual fund investing is not about following fashions and events. It's about sticking to a small number of funds which are genuinely diversified and are not limited to any sector or theme or situation. It's also about investing gradually and not trying to time the market or a particular event. And it's about businesses that benefit from the general growth and prosperity over years and decades.
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