Don't let speculation govern your money decisions prior to Budget

Buying or selling securities based on rumours about expected changes in tax rates or sectoral sops can backfire

The Union Budget for 2022-23 is round the corner. Capital market participants are keenly awaiting Finance Minister Nirmala Sitharaman's announcements, especially tax-related proposals and measures to boost the economy. The increased news flows and speculation around this time often prompts investors to buy and sell securities based on them.

Financial advisors say long-term investors with definite financial goals need not take decisions based on what might be announced on Budget day. “Avoid overthinking. Don’t take any investment or personal finance decisions based on what may happen in the Budget,” says Harshad Chetanwala, co-founder, MyWealth Growth.com.

Ignore tax-related rumours

Do not buy or sell based on speculations relating to changes in tax rules. For example, each year there is speculation around a hike in long-term capital gains tax rates. This should not be a reason to sell assets and book profits or losses.  “Avoid making portfolio changes due to expectations of changes in tax rates as such changes often come with grandfathering provisions,” says Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors.

The decision to purchase a financial product should be driven more by your needs rather than the tax benefit available on it. For instance, if you have taken a home loan or some other new liability, you should increase your term cover. This should be done irrespective of whether the Section 80C tax deduction limit is enhanced in the forthcoming Budget.

Avoid sectoral bets

Do not buy stocks in a specific sector or thematic fund based on rumours that the government may announce sops for it. The Budget documents are prepared in utmost secrecy. “There is a big risk that the speculation on benefits being given to a particular sector may not materialise,” says Kartik Jhaveri, director, investment services, Transcend Capital.

The real impact on sectors anyway happens after the Budget announcements. “The announcement could be positive or negative for the sector. Sometimes, investors’ early reactions are based on an over-estimation of the impact. Acting in haste can lead to incorrect decisions. It is better to take some time to understand the long-term impact and then invest,” says Chetanwala.

Change asset allocation?

After the rally over the past 18 months, valuations in the equity market are at elevated levels. In addition, there are macroeconomic challenges such as volatile commodity prices, high inflation globally, and a possibility of rate hikes both globally and in India. The Budget could also contain both positive and negative surprises. A number of retail investors are wondering if they should reduce their equity exposure prior to the Budget.  

If you are sitting on major gains in your equity portfolio due to the bull run, you should rebalance. “If the portfolio has become overweight on equities, rebalance right away and bring it back to its long-term strategic asset allocation,” says Dhawan. This decision, he says, should be made independent of the Budget.

Indian investors have increasingly begun to invest in international mutual funds. “This part of your portfolio will anyway not be affected in any meaningful manner by the Budget,” says Dhawan.

Adds Jhaveri: “Rebalancing must only follow your overall strategy and financial planning.”

Investors should get rid of the low-quality stocks or penny stocks in their portfolios that have been moving up without any fundamentals to support them.

Finally, focus more on a few internal factors. “Keep your financial goals, risk appetite and time horizon uppermost in your mind while making investment decisions, rather than Budget expectations,” says Dhawan.