Track but retain long-term focus

What is the Union budget?

At its core, the Union budget is a statement of the central government’s estimated income for the coming fiscal year, the expenditures it plans under various heads, and how it intends to bridge the deficit, since it typically spends more than it earns. Over the years, however, we have attached undue importance to it, often treating it as a life-changing event. That is not to downplay its significance—it does affect us, but only to a limited extent.

The budget matters because when the government seeks to promote a particular sector or channel resources into a chosen area, it tweaks spending allocations accordingly. Over time, these changes begin to fructify in the targeted industries or sectors. As participants in the broader economic ecosystem, we are affected in one way or another, albeit gradually.

The reason the budget is not truly life-altering is that most of what India has achieved since Independence in 1947 has been driven by the efforts of its citizens, industrialists, and other stakeholders. The government provides direction, but how optimal that direction is remains open to debate. Seen in this light, the Union budget is merely a pit stop in the government’s longer journey. Once the finance minister finishes the budget speech, opinions and analyses will pour in from all sides—and it is up to each of us to sift through them and focus on what is truly relevant.

What happened last year?

The reduction in income tax rates under the new tax regime was significant, putting more money in taxpayers’ hands—particularly the often-ignored middle class. It helped boost consumption and supported economic growth. However, such changes cannot be expected every year. Yet, as each budget approaches, we continue to keep our fingers crossed, hoping for something positive in the forthcoming announcement.

How does it affect your portfolio?

Immediately after the finance minister’s speech, attention shifts to movements in equity market indices. To be clear, indices such as the Nifty or Sensex move every day. On budget day, however, the swings tend to be sharper—more like a T-20 match than a Test. In the long journey of any index, though, it is just another trading day. On a historical chart, a past budget day appears as nothing more than a single point in a long-term upward trajectory. There is little reason to rack one’s brains over it.

The budget does incentivize certain sectors, and investors who can identify these and adjust their portfolios accordingly may benefit. That said, the immediate aftermath is often filled with noise around the most visibly favoured sectors. The devil lies in the fine print, which takes time to interpret. Rushing into a sector purely on the basis of budget announcements risks ignoring the bigger picture. Stock prices and market movements reflect the confluence of many factors, and identifying actionable opportunities is a professional exercise. Fund managers and research analysts are paid to do this work, and it is prudent to rely on their insights if one lacks the time or expertise to conduct such analysis independently.

A simpler alternative is to invest through index funds or exchange-traded funds (ETFs) in the large- or mid-cap space. Sectors that perform well, or are expected to do well, gradually attract investor interest, leading their constituent companies to gain market capitalization. During periodic index rebalancing—conducted quarterly or semi-annually—these companies gain higher weightage, replacing those that fall out of favour. Investing in index funds or ETFs is therefore less about reacting to the budget and more about participating in the broader market trend without the need for constant analysis.

This year, however, 1 February will be slightly different. We will find ourselves watching both the ‘ECG graph’ of the Nifty and the Sensex and the announcements from the finance minister.

Joydeep Sen is a corporate trainer (financial markets) and author.