Avoid knee-jerk responses to Budget proposals

Analyse the impact of proposals on your investment portfolio and make adjustments in the days to come

Every year, when the finance minister (FM) presents the Union Budget, there are hopes and some fears that changes will have to be made in one’s investment or savings portfolio to avail of tax benefits. However, things don’t always pan out as expected. Proposals announced in the Budget that are perceived to be negative sometimes lead to sell-offs in the equity markets. The retail (small) investor should stay aloof from such frenzy and respond in a measured manner.

Sometimes, even while the FM is delivering his speech, stocks are affected by the negative announcement tank. “Retail investors should not act based only on the speech. Refer to the fine print in the Budget documents before taking a decision,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers.

Pay heed to when a Budget proposal will come into effect. Many proposals come with a grandfather clause, which means a cut-off date from which they become effective. Investments made before that are not affected .“Some proposals, especially investment related ones, become effective immediately. There is little you can do about these,” says Kunal Bajaj, founder and chief executive of Clearfunds.com, an online investment advisor registered with the Securities and Exchange Board of India (Sebi). Some proposals become effective after the Finance Bill is passed. Often, the government modifies the language in the Bill, based on feedback from experts. Sometimes proposals get rolled back, as happened last year with the suggestion to tax the final Employees’ Provident Fund corpus. Hence, waiting for some time can be fruitful.

Even if changes like rise in the tenure of long-term capital gains takes places, there is no need to panic. After all, as long-term investors, such changes barely make any significant difference.

The rate at which shortterm capital gains are taxed, 15 per cent currently, could be raised. Understand in detail the implications of any such change. Not all these changes will be equally negative. “If the investment horizon is raised from one to three years or a higher tax rate is imposed on short-term capital gains, these changes will not be so negative for small investors with long-term investment horizons. Only a tax on longterm capital gains will reduce equity returns,” says Dhawan. Even if such a tax is imposed, investors should not move out of equities. “If you move out only because a tax has been imposed, you will miss out on the tremendous long-term growth potential of equities,” says Bajaj.

Sometimes, proposals perceived to be negative in the immediate aftermath of a Budget turn out to be positive in the long term. When tax norms for debt funds were changed in 2014, the initial reaction was negative. “But, the changed norms nudged investors to invest in debt funds for a longer period. This has proved positive in a declining rate scenario, allowing investors to make higher gains,” says Dhawan.

Often, it is best to stay focused on one’s goals and not be perturbed by new tax norms. Tarun Birani, founder, TBNG Capital Advisors, cites the Securities Transaction Tax. “When it was introduced, it was perceived as very negative. In a few months, the dust settled. If the investor has his eyes fixed on long-term goals, he is unlikely to be affected much by marginal changes to tax norms,” he says.