Budget 2024: Deciding investments based on expectations? Don’t — This study cautions long-term investors. Here’s why

Union Budget 2024: The top 500 companies in India have provided investors with a median return of -0.1 per cent across 24 Budget days since 2000, a study by Capitalmind Financial Services found.

In a release, the SEBI registered portfolio manager said that Union Budgets are a “poor prediction of annual returns”, adding that long-term investors should avoid making market decisions based on expectations or announcements made in the Union Budget.

The study, in effect, found that Budget announcements had little to no effect on stock performances and were hence not the most impactful indicator to track when choosing investments.

‘Long Term Driven by Fundamentals, not Budget’

“What our study implies is that while there tends to be significant volatility leading up to and immediately after the budget based on expectations, the longer term is driven by the underlying fundamentals of corporate earnings growth,” Anoop Vijaykumar, Investments & Head of Research, Capitalmind, said in the release.

He added that long-term investors “should avoid making significant equity allocation decisions based on expectations or announcements made in the budget. Instead, they’d be better served by staying the course with their investment plans, keeping their financial goals in mind.”

Examples of Markets Reactions to Budget Announcements

The Capitalmind study cited four unintuitive examples to explain how the markets reacted to Budget announcements over the years. It noted that markets remained unpredictable on Budget day and that annual performance could also not be deduced based on Budget impact.

• In February 2003, the NDA government's Budget announced new taxes, including state-level VAT and service tax. On the day of the announcement, the CNX500 gained 0.5 per cent; a month later was down 6 per cent, and a year later, the market had doubled.
• On July 8 2004 (the Election year full Budget, similar to this year), the UPA government abolished the Long-Term Capital Gain tax on equities and introduced the Securities Transaction Tax (STT). This announcement meant that gains from stocks and mutual funds longer than a year would be tax-exempt, but despite the positive news for investors, the CNX500 tumbled 3.2 per cent that day.
• In February 2015, the NDA government announced a roadmap to reduce corporate tax to 25 per cent. But the news, which would directly boost corporate earnings, saw CNX500 rise a marginal 0.4 per cent the day of the announcement, while the market fell 3.6 per cent a month later and ended the year down 18.7 per cent.
• In 2018, the NDA government re-introduced 10 per cent LTCG tax on annual gains over ₹1 lakh, and the CNX500 registered 0.1 per cent down. A month later it was down 4.6 per cent.

Other Key Observations

• The study noted that the best return on the Budget day was 4.1 per cent gained by investors on February 1, 2021.
• The worst return for investors was recorded at -5.4 per cent on July 6, 2009.
• Watchful behaviour was observed leading up to the Budget announcement, with negative median returns seen one month (-2.2 per cent) and one week (-1.4 per cent) before the central government announcement.
• The study found investor behaviour one year prior and one year after the Budget to be “mirrored”, with investors reducing exposure due to uncertainty -63 per cent of the time, followed by re-entering once uncertainty recedes post Budget announcement 62 per cent of the time.
• Investing one day before the Budget gives a "coin toss" return on investment one month later, with a 54 per cent probability of being negative.
• The odds of positive returns on the one year time frames are consistent with the overall equity market behaviour.