This quote, often attributed to King Louis XV of France, sprang to the mind when finance minister Nirmala Sitharaman presented her maiden budget on Friday. Influential sections have criticised her for failing to introduce a single, grandiose theme. Yet, she might leave an impact that only a few are considering at the moment.
The reasons are not far to see. The government’s annual exercise would bring investors a step closer to market-determined returns and gradually help them dissociate from traditional income-bearing instruments.
A host of factors would strengthen the case for greater market orientation for investors in the coming days, and even smaller, absolutely ordinary participants would perhaps be prompted to increase their allocations to what are commonly categorised as market-linked products.
Such benign factors range from the government’s positive stance on equity exchange-traded funds (ETFs) to tax benefits for home loan takers to interchangeability of Aadhaar and PAN. All said, some of the finance minister’s budgetary pronouncements can lead one to bet on the following possibilities:
- KYC norms for investors would turn simpler in the days to come. The process would be aided by the use of modern, cost-efficient technology.
- The authorities would not be averse to the idea of modifying their existing strategy on PSU divestment in order to accommodate its reformist stance. More state-controlled companies would be expected to tap the market, resulting in fresh opportunities for ordinary investors to trade in their stocks.
- There would be greater public involvement in the listed space anyway, thanks to the government’s willingness to increase the minimum shareholding in companies to 35 per cent from 25 per cent
- Smarter investment avenues, including AIFs (alternative investment funds), would soon occupy greater mindspace than before. These would be suitably complemented by REITS (real estate investment trusts) and similar new-age product categories, including those that could be focused on start-ups, another vital area for the present government.
These, however, are just one side of the emerging picture. The pace of implementing reforms could easily turn excruciatingly slow in our country. And, inspite of good intent, a lot of niggling issues could cause inordinate delays, a fact that would not go down well with smart investors. The latter would require the government to take prompt action in terms of legislature and, later, ensure compliance as well.
Things to do
The emerging trend might not actually spell good news for traditional fixed-income bearing instruments, which are still coveted by an influential section. The latter is drawn to them because of their relative safety. Indeed, ours is a system driven largely by savings (especially household savings, the rate of which is quite high even today) which take the shape of deposits. This can be expected to change in the days ahead, thanks to the market’s escalated interest in well-regulated and professionally-managed asset classes. Savers, after all, are quickly evolving as investors in our country.
In a backdrop marked by budgetary announcements and the principles embraced by the FM, an average investor could do well to remember a few fundamental matters. And if you fit the bill, here is a list.
- Invest strictly in line with your risk profile. Your asset allocation must be based on a clear rationale. Also, such basics as diversification or re-balancing must never be forgotten.
- Your investment strategy must be methodical, to be pursued systematically to optimise the effect of compounding, preferably without long breaks.
- At all times, the potential impact of taxes and inflation on your portfolio must be assessed.
- The possibility of taking home capital gains must be explored at all opportune moments.
- Capital gains, whenever booked, must be utilised purposefully too.
The significant other
Fixed income seems to be in a markedly declining mode, at least for now. While some quarters would call it evergreen, there is a strong case for asset classes other than fixed income. These obviously include equity, commodities and real estate. Each has its own set of compulsions.
Weigh the relative merits of all these assets to choose the best (that is, the ones that are likely to provide optimum returns) among them. Each allocation must be done carefully, with specific objectives in mind. To do this efficiently, all risk factors must be considered.
Equity — with a tactical exposure — can be reasonably expected to fetch sharp returns over the medium to long term. Harbouring short-term views could be dangerous for your portfolio. The same will apply to commodities, including popular ones such as gold and silver. Real estate, however, will be expected to act as good diversifiers even for the lay investor.
In the days to come, investors must not expect extraordinary returns to be generated in every market cycle. It would be foolish to wish for superlative figures from fund managers, even the most astute ones, for years at a stretch. The new government’s budget has been placed, and this is the right time for you to start working on your holdings.
The writer is director, Wishlist Capital Advisors