Investors should increase their allocation to financial assets as Budget proposals signal a continuation of policies that bode well for these assets. The Budget has created a healthy macro-economic environment with noticeably low current account, fiscal deficit under control and inflation hovering around the 5 per cent mark.

All these will help aid economic growth over time and, as a result, financial assets such as equities and debt are poised to make excellent investments. When it comes to physical assets, the Budget seems to nudge people away from real estate and gold. Tax benefits extended to the real estate sector are being abolished, while tax-free rental income, and concessions on interest income on borrowings to invest in real estate sector have been restricted. Gold, which has briefly done well over the last year thanks to the depreciation of the rupee, currently seems to be a story as strong macros are likely to keep the currency under check.

Highly rewarding

Therefore, we believe that the strategy ahead for investors should be to avoid investing in physical assets. Instead, investing in financial assets may prove to be highly rewarding for investors. The key here is not to wait for an uptick in the earnings cycle, but to focus on accumulating financial assets at every opportunity.

Currently, equities are neither cheap nor expensive. However, the inflows into financial assets are expected to improve, owing to Budget proposals. This leads to the possibility of a further re-rating in the stock markets. Corporate earnings are also likely to rise over the next two years as economic growth policies take root.

One clear outlier in this Budget has been the infrastructure sector. The government has increased allocations to the sector considerably, which includes building roads, railways, and power and other infrastructure. Given that this sector has been an underperformer for several years because of the high leverage, further fall in interest rates, coupled with increase in infra spending, would be the key drivers for this sector. As a result, a savvy investor can invest into this space, through infrastructure funds.

Other options

Technology is another segment for a long-term investor. This has been under pressure owing to the US political scenario. Since many of the players here are available at attractive prices, the low valuations present a good risk-adjusted opportunity.

In effect, investors who are under-invested in equity currently, but can make lump-sum investments can consider dynamic asset allocation funds that allow exposure to both debt and equities. In the debt market, investors have the opportunity to invest in dynamically-managed duration funds. In savings and credit funds, returns will be largely driven by the differences in yields and expenses. As further fall in yields seems limited, investing in accrual strategy funds and funds that manage duration dynamically is recommended. Investors can also choose duration funds.

The Budget, thus, provides a strong impetus for economic growth and equity asset price expansion. So, go right ahead and invest systematically to benefit from the India growth story.

The writer is MD & CEO, ICICI Prudential AMC

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