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Budget 2021 - You can no longer ignore investing in equity

If you were sitting out of the market thinking a big correction will come, you would be feeling a sense of regret. The only way to manage investments in equity assets is to focus on asset allocation.

On the back of a clearly growth-oriented Union Budget 2021, the equity market, notably its benchmark indices, rallied 5% on Monday, 1st February. 

Just as investors were beginning to think that the pullback in 2020 rally might get deeper, the direction has changed and with a decisive footing. This sharp single day move up is another example of why timing the market is rather useless. 

If you were sitting out of the market thinking a big correction will come, you would be feeling a sense of regret. The only way to manage investments in equity assets is to focus on asset allocation. 

Given that the latest budget announcements have focused on pushing economic growth through a spending drive, the expectation is that both corporate and individual earnings will get a boost. Thus, not only is there an expectation of investment-led growth but also subsequently this investment can stroke consumption-led contribution to growth. 

Is it too late now?

A sudden sharp rally may now leave you thinking again whether you should wait for another pullback to invest more or whether you should invest all your surplus in one go. 

The answers to such questions lie in individual situations and risk tolerance, however, if you hadn’t deviated from your original asset allocation, the answer would simply be, continue investing as you are. The benchmark Nifty 50 has rallied 87% since the bottom seen in March 2020; that too in the middle of a severe global health crisis.

Given that the latest budget announcements have focused on pushing economic growth through a spending drive, the expectation is that both corporate and individual earnings will get a boost. Thus, not only is there an expectation of investment-led growth but also subsequently this investment can stroke consumption-led contribution to growth. 

This means that estimates of earnings growth from corporate India will get recalibrated and eventually this will show up in equity market returns. A bump up in expectations for GDP growth in FY22 will push up equity market returns higher than earlier expected for 2021 too. 

The asset class of choice

Another aspect to watch out for is the low-interest rate regime. Globally, interest rates are at their lowest in many years. In India too, we are looking at the benchmark Repo rate at 4% per annum, which is currently lower than the long-term yield on government securities. 

This indicates two things, firstly that corporates will continue to benefit from lower interest expense, which in turn benefits profitability for equity shareholders. Secondly, fixed income returns will continue to remain low. At the same time, a consumption boost can fuel inflation. 

Inflation creeping up will eat into the return you earn on your investments, where such return is already low (fixed income interest) you may even see a negative real return. For long term wealth creation and growth of your portfolio, equity investments are likely to be the most likely and efficient way out. 

You cannot afford to be out of this asset for your long-term wealth creation, especially in the current economic environment. 

If you don’t already have an asset allocation designed for your investment objectives, do it now. Don’t wait for market levels to reach here or there; as the Indian economy grows, so will returns from its stock market and to gain from those you have to be invested starting today. 

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