Track Budget for investment cues

The next financial year is going to begin in just over eight weeks. Also, the Union Budget for the financial year 2024-25 will be announced next week. This is a crucial period if you have just commenced your investment journey or are about to embark on it. There are some critical ‘trackers’ in a Budget which young investors should follow and evaluate. These help you take the right investment decisions.

Go long term

Young investors should adopt a long-term perspective while taking investment decisions. Your objectives may be increase returns, enhance security, reduce tax liability and so on. Keeping your objectives in mind, you should evaluate how the Budget’s provisions help you in achieving your objectives. For example, investing in insurance and real estate may provide higher security, but not liquidity. Investments in equity may provide increased liquidity and returns, but not security, due to the higher risks they carry.

Points from the Budget

The Budget is always preceded by an economic review for the past year as well as expectations for the future. This gives a broad overview of how the economy has performed over the past year - sectors that have grown, sectors that are expected to grow in the future, inflation expectations, GDP growth and so on. While this document is in great detail you can go through the numbers broadly to understand the economic outlook presented.

This is then followed by the Budget presentation in Parliament. The allocations for the various sectors are tabled. The sections of the Budget which most people look forward to are the direct and indirect tax proposals. Direct tax refers to income tax. This is what all taxpayers are concerned about and track closely. It specifies the changes in income tax rates and slabs on various sources of income – salary, long-term and short-term capital gains, income from property, dividend income, income from business and profession etc.

The Budget gives you an idea of the priorities of the government for the next year. It gives you an indication of sectors expected to grow over the next few years. For example, Budget allocation may be increased for defiance, infrastructure or health sectors. This indicates that these sectors will get a stronger push both from the government and private sector. This can help you choose stocks of potential companies in these sectors – those that have the potential to yield high returns.

Significance of tax

The tax rates are crucial too for investors. An increase in tax on certain products indicates the government wants to discourage their use. The increased tax rate on such products may have an adverse impact on the profitability of the companies in those sectors, and accordingly adversely affect their stock prices.

In such cases, you can choose either to exit those stocks or not to invest in companies producing those products.

That apart, should follow changes in personal income tax rates on various sources of income. For example, a higher tax rebate or incentive on interest payable on home loan indicates the government wants to promote housing. You can go in for a higher home loan if you are buying property or invest in property so as to claim the higher income tax benefit. Similarly, in case tax on long-term capital gains on sale of shares is reduced, you can plan entry and exit strategies in the stock market, to benefit from these lower income tax rates. In this case, you can even increase your allocation to equity in your portfolio.

The government also provides income tax incentives for investments in saving schemes and instruments such as Provident Fund, unit-linked insurance, medical insurance etc. You can evaluate these options as tax-saving avenues, post the Budget.

Portfolio allocation

The priorities allocated to sectors are valuable guides for young investors to allocate funds to various investments in their portfolio. Once again, it is prudent to say young investors should always plan with a long-term perspective. Also, the earlier you begin investing the better, both from wealth creation and financial security perspectives.