What Should Mutual Fund Investors Do After Budget 2021?

The Union Budget is one of the most important annual events for investors. It provides exceptional insights into what the government will prioritize in the financial year. Based on this information, investors can adjust their strategies to make the most of the equity and debt markets.The growth-oriented Budget 2021 has ticked all the right boxes to help the country’s economy recover from the COVID-19 pandemic. Industry experts have lauded Budget 2021 for its strong intent and growth-centric approach.But what does it mean for investors? Should investors sit tight on their mutual fund portfolios or rework their strategies? What should be equity and debt allocation? Here are some detailed insights that can help answer these questions-

Even the most optimistic investors didn’t expect the equity market to reach all-time highs as quickly as it did after the pandemic-fuelled 2020 fall. From hitting 7,610 in March 2020, Nifty 50 crossed 15,300 in February 2021.Global markets, easing lockdowns, businesses resuming their operations, and a steady increase in the number of new retail investors are some of the reasons responsible for the current market euphoria. The growth-focused Budget 2021 further boosted investor sentiments. But will this up-move last throughout 2021?If industry experts are to be believed, equity investors should be very cautious with their investments. Almost every popular indicator is suggesting that the market could correct steeply in the coming months. Once the correction occurs, it might be a rangebound market throughout the year.

The large borrowing plans of the government announced in Budget 2021 suggest that interest rates might start rising in the following months. Once the interest rates begin to rise, the 3-year rally of the bond markets might come to an end. This can negatively impact the yields from debt mutual funds. While the RBI has not made any changes to the interest rate in the recent February 2021 monetary policy, the inflation band is revised to 5-5.2%. In its December 2020 monetary policy, this was 4.6-5.2%. However, the RBI has hinted that the cash reserve ratio would be increased in phases by 1%-4% by May 2021 to normalize liquidity.From a 6-month to 1-year perspective, this can impact the returns generated by debt and liquid funds.

Budget 2021 has proposed to reduce the customs duty from 12% to 7.5% on gold. Moreover, infrastructure and agriculture cess has been imposed on the yellow metal. It is expected that gold prices will underperform in the short-term due to these proposals.But gold is commonly used for hedging by investors when the markets are uncertain. Coupled with higher liquidity in the Indian financial system, gold prices can appreciate in the medium to long-term. Investors can allocate some portion of their portfolio to physical or digital gold.

Rather than exiting your mutual fund investments haphazardly, it is time for investors to reallocate the assets and use the market movements to their advantage. While equity markets are expected to correct from the current levels, some sectors, such as infrastructure, IT, and healthcare, are expected to deliver decent returns.A mutual fund investor who is already making significant profits from equity fund investments should consider moving the profits to other assets and consider sector-specific funds. If you have any significant expenses coming up in 2021, sell some of the fund units and keep the money safe in your bank account.If you’ve invested in long-term debt funds, you can consider switching to short-term, liquid, or overnight funds. A combination of sector-specific equity funds and short-term debt funds in 40:60 or 30:70 ratio is highly recommended for 2021. You can adjust the ratio as per your risk appetite and investment objective.

Budget 2021 has made it clear that investors should use a defensive and not aggressive investment approach this financial year. Book some of your profits and reallocate your funds smartly to make the best of the available opportunity.You can also consider the professional assistance of an investment advisor to work on a custom strategy that is ideal for the current market conditions and fulfils your investment objective.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.