Event-based investing leads to delay and lost opportunities, data show.
Every year, there is a big buzz before the Union Budget. Television channels and newspapers use most of their bandwidth to predict what the finance minister would do. And, there are experts who give their opinions on expected market movements, post Budget.
Investors often find themselves swayed by statements from experts like ‘markets will react adversely if the Budget hikes the excise duty on cars’ or ‘market will rise if there is higher outlay for infrastructure spending’.
As a result, there is much confusion on what will happen. “Many of my clients delay their investment decisions before an event like the Union Budget. They argue that they will have a better idea about the market direction after the event,” confessed one financial advisor.
However, if one looks at the past five years’ data, the hangover of the Budget on markets has been limited.
Look at the 2006 Budget. The Bombay Stock Exchange Sensitive Index, or Sensex, stood at 10,282 points. Within a month, the Sensex had gone up 7.75 per cent to 11,079. And that, despite the fact that Finance Minister
P Chidambaram had hiked the securities transaction tax (STT) by 25 per cent (to Rs 12,500 per crore for both buying and selling). In the next six months, the index rose by 12.55 per cent and after a year, it was up 31.1 per cent.
|
BUDGET PLAY |
Budget day
-
Without the interim Budget on Feb 16, 2009
If one goes through the numbers, markets have absorbed all the negative or positive developments of the Budget. The only year annual returns from the market fell by over 50 per cent was in 2008. They reacted more to global news like the bankruptcy of Lehman Brothers in October and the overall fear that there was going to be meltdown in the financial sector.
In all the other years, the markets rose consistently. Of course, in the short-term, markets have often behaved differently. Post Budget 2007, the Sensex fell 2.6 per cent in the first month, only to rebound and give 32.25 per cent annual returns.
Market experts said many investors pay too much attention to events. “I have several clients who deferred their decision to invest. In fact, one client has not invested since last year.
He was first waiting for the elections to get over. After that, when the markets shot up, he decided to hold on to cash. And, he is still waiting for markets to correct,” said a Delhi-based stock broker.
According to him, while traders need to react to events, investors seldom have to. And investors in markets through systematic investment plans (Sips) of mutual funds should never bother with events at all.
Of course, if one is investing a lumpsum amount, it would be a good idea to invest in a staggered manner. “Investing a lumpsum in parts is great as a strategy, but it is irrespective of any event. If you are investing a large amount, it should always be done in smaller tranches,” added the broker.
Yes, sometimes a stock investor needs to realign their stock portfolio after an event. For instance, in the Budget there are sops for the hotel industry and infrastructure companies.
So, a stock investor may want to increase his/her exposure to such stocks.
However, only minor tinkering that needs to be done. The overall portfolio need not be shaken up. As a financial advisor said, “Events are like blips in the radar. Even if they do come during a flight, they do not alter the flight path.”
