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Nifty, Budget, US Federal Reserve, Investors

Nifty Rebounds Amidst Budget Anticipation: How Should Investors Be on High Alert In Budget Week?

The Nifty rebounds on budget anticipation and expectation of positive announcements from the US Federal Reserve. Valuation can shoot up in the following sectors this week but how and why should investors be cautious

On January 29, 2024, the Sensex and Nifty resurged reaching 21,745, recovering from a significant dip three days earlier. The resurgence was fuelled by optimistic sentiments driven by promising US Bureau of Economic Analysis data released today. However chance of early interest rate cuts to be announced by the Federal Reserve on January 31, 2023, and expectations surrounding the upcoming budget are the larger causes. The Nifty has declined in three out of the last four weeks, dropping over 800 points last week from its peak of 22,124 points on January 15, 2024.

The surge today is primarily fuelled by expectations from the forthcoming interim budget with significant allocations in key sectors like infrastructure and energy. Noe that the interim budget, to be presented on February 1, 2024, and the US Fed decision on January 31, 2024, could create a volatile week ahead. The market is bracing for potential volatility. Protecting your investment portfolio from market volatility is crucial for long-term success, especially in current times of high volatility.

Investor Considerations In Budget Week

Overshooting Possibility: Despite being an interim budget, select sectors, including infrastructure, energy, green energy, and railways, are expected to see more funding. For instance, in the interim budget of 2019, Rs 1.58 lakh crore was allocated for railway development. This should help stock prices. On January 29, 203 IRCTC shares were at Rs 981 Rs a piece almost around the highest price listed this year, as per Google Finance data. In a year, IRCTC shares have gained 57 per cent on the NSE so far. So shares of companies in these sectors may see an overshoot this week. Watch for overshooting in stock valuations, especially whenever there is excitement in a particular sector.

Profit-Taking Traps: When certain sectors receive funding support from the government, stocks tend to be overvalued further. Traders invest during major announcements trying to get the better out of a false market optimism. Investors should be wary of falling into traders' profit-taking traps, as such tendencies are likely this week.

Correction Possibility Ahead: In the September to October period 2023, there was some valuation drop which had been falsely built in the preceding 6 to 12 months. But many experts including Kotak Institutional Equities said that the correction was minimal and more correction can be expected ahead. Conducting thorough research to find where companies you invest are with little or no profits, and the P/E ratio of the stock is crucial.

How To Stay Cautious?

Says Basavaraj Tonagatti, a Certified Financial Planner, "Instead of focusing on market highs, investors should prioritize determining when they require the funds. Consequently, it is crucial to assess the asset allocation rather than making decisions based on market events. These events are inherent to long-term investors and, therefore, risk management becomes the utmost important factor.” For those with investment goals within 3 years, reassessing asset allocation by moving more assets from equity to debt should be considered.

Says Sriram Jayaraman, a Sebi-registered investment advisor (RIA), “Investors should follow a reasonable asset allocation between equity and fixed income based on their risk appetite. Keep investing through the bull and bear cycles and not react to every bit of news coming out.”

Further, it is not possible to accurately figure out whether the Indian market is overvalued. Instead, always limit the equity allocation to 50 per cent of the portfolio and using the large-cap Nifty 50 index fund to stick to safer equities can be considered.

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