Keep cash in hand ahead of elections, Budget

There are times when certain critical events can leave your entire financial position in a state of upheaval. This can spring a surprise and it is essential to identify these events beforehand. This will enable you to take the necessary steps to ensure the fallout can be managed.

There is no foolproof method for identifying such events but here is what such a situation entails and how it can be tackled.

Specific events

There are various examples of specific events that can prove to be extremely important for your financial planning and your portfolio. These events are critical because they lead to a change in the conditions that impact multiple investments, including a change in the outlook which could go against the basic reason for making an investment. One such event that causes such an impact is elections.

In this regard, the general or Lok Sabha elections are more important in the sense that there is a lot more at stake when the central government is going to be chosen. The various state elections might have a limited impact, as often this is limited to companies that are relevant in a particular state or it might give an indication of the trend  prevailing at the national level.

Another specific event that plays an important role is the Union Budget, as various policies related to investments, taxation and markets are finalised here. There can be significant fallout of the decisions in the Budget and this becomes an event to watch.

There are specific other developments that can throw the entire financial process in a tizzy. The September 11 attack on New York’s World Trade Center was one such event and similar was the case when India undertook a nuclear test in the late 90s.

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Impact

These events require a detailed analysis, as their impact is severe and felt on the entire financial plan. Let us consider a couple of examples that will show how this is actually so. Take the position in 2004, when the equity markets expected a return of the NDA to power but the alliance was upstaged by the Congress-led UPA. It led to a situation where the equity markets crashed to a lower circuit and investors suddenly saw large losses on their equity portfolios.

Those expecting a certain tax impact in the ensuing Budget also needed to reset expectations. It also required their portfolio to be in tune with a government led by Manmohan Singh as the prime minister but also having the Left parties in support.  

The situation during a Union Budget is even more precarious, as the individual could find his or her planning has been upturned due to a change in tax laws. Changes in tax rates or higher duties on certain areas, including gold, would impact their investment planning. There are times when apart from the direct impact, there could also be an indirect impact.

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For example, the upturning of the Supreme Court decision regarding the Vodafone tax issue and retrospectively changing the tax laws had a long-term impact not only on the company but on the way India was perceived as a foreign investment decision. This could require some strategies.

There can be a large-scale impact of big events, as several asset classes can witness a reversal in conditions. There could be a reversal in trend in equities or it could be that interest rate conditions change in the direction opposite to what is expected. It could also be that some commodities like gold, where the individual has exposure, would witness a changed position.

It is not necessary that the position could be negative at all times, as it could result in a rally in asset prices or it could be a better outlook for the future. This would require that the individual take a complete relook at the portfolio and exposure and asset allocation and then take additional action. It could also require a change in the expenditure pattern.

This need not happen every time a big event occurs but the task is to ensure that one is not caught unawares. If they have not included this factor in their workings, they would need to incorporate it.

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Getting ready

It is important events like these do not catch an individual off guard. One way is to be on the lookout for specific developments or events that are likely to have some financial fallout. Elections and Budgets are clear examples; similar would be a situation when there are some big policy decisions likely to be made. This would require constant effort to see what big events are likely to come up and then take a look at the fallout.

The other way is to have a clear idea about your various investments. This is crucial because a large exposure to a specific area can catch you unawares and this could have a severe impact. For example, a complete idea about the equity exposure in a portfolio, along with the debt holdings and also if there is a commodity exposure would be a good starting point. Otherwise, there could be a major event that might disrupt the entire position of the individual.

So, if there is a large exposure to, say, gold and silver and these precious metals suddenly take a large plunge because of a fundamental change in the overall monetary policy, then there should be readiness to tackle that position. Unless there is proper knowledge of what the current position is and what the way forward is, there is not likely to be a way to tackle this.