Budget 2023: MF investors should bet on sectoral, thematic funds that have turned attractive

The Budget running up to the general elections raised hopes and concerns around the possibility of it being borderline reckless and populist. Yet, the government decided to put fiscal prudence first. It is easy to mistake a simple Budget for an uneventful one but a deeper understanding of India’s current economic context and the government’s tight-rope walk would help one conclude that the best thing about such a Budget was the delivery of so many without breaking any.

The Budget is a relatively well-rounded one, capturing most arenas critical to overall economic growth. The government has lived up to expectations around the commitment to capex and focus on socio-economic development while retaining fiscal prudence. Among many, the following segments are highlighted as ones forming the core of the government’s long-term socio-economic agenda.

1. Railways

Allocation to Railways has been increased by over 70 percent versus Budget Estimates of the previous year to Rs 2.4 lakh crore, its highest-ever outlay. For context, the amount is nine times earmarked to the sector in FY14. The increasing allocation and attention to Railways as a sector is important, especially considering its critical role in larger infrastructure, freight and logistics roadmaps.

Key sectors & segments to benefit: Wagon manufacturing, rail engineering and railway financing.

Green Energy

As a part of the government’s larger vision for green growth, a special focus has been laid on green fuel, energy and mobility. The segments will need to continue to remain in focus and gain economic and policy support if the government wishes to achieve the ‘panchamrit’ and net-zero carbon emission target for 2070. The recently launched National Green Hydrogen Mission with an earmarked amount of Rs 19,700 crore and Rs 35,000 crore earmarked towards priority capex investments for achieving energy transition goals are efforts in the same direction.

Key sectors & segments to benefit: Petrochemical companies with the ability to develop alternate fuels, alternative energy production and transmission and power generation companies.

General Infrastructure

The government has decided to step up its contribution towards large-scale infrastructure development. In line with the focus, the government has also established a new infrastructure finance secretariat to further streamline processes and ensure funds flow into requisite infrastructure projects seamlessly while also seeking to shore up private participation in the same. Urban planning and development have taken centre stage as the central government seeks to work closely with state counterparts for developing high-quality urban cities well-equipped with necessary civic amenities. A similar focus has been laid on logistics development.

Key sectors & segments to benefit: Basic materials, utilities, power generation and transmission.

Catch all the LIVE updates on Budget 2023

Rural Development

The Budget’s incremental focus is on developing tourism in rural India through efforts like the development of a packaged tourism deal, digitally-enabled tourist experience and the unity mall. The government has also ensured that critical segments of rural income like animal husbandry, fisheries, agriculture, and fertilisers receive generous allocations to further develop the socio-economic positioning of rural India.

Key sectors & segments to benefit: Rural consumption, microfinance and credit, agriculture-related goods and services.

ALSO READ: Budget 2023: Is the Rs 7-lakh tax-free income limit only for the new tax regime?

Key takeaways for investors

The Budget may have been a relatively low-decibel one but has been an effective one. It detailed the government’s commitment towards expanding the capex outlay through sector priorities and the execution path that they seek. While the key themes, sectors and segments have been highlighted, here are a few additional takeaways that will help an investor review investment decisions in light of the contents of the Budget.

ALSO READ: New slabs, more rebate — 5 big personal income tax changes in Budget 2023

i. Pegged at 5.9 percent, the budgeted fiscal deficit seems manageable, especially in light of expectations around continued robustness in tax collections and the marginally reduced burden of the subsidy bill. A higher probability of missing the Rs 61,000 crore disinvestment target has been taken into consideration leaving headroom for any surprise to the upside.

ii. While the government has stepped up its capex commitment, the pace of project completion and revival in private capex remain two critical metrics that will define a large part of the capex-driven success story.

iii. The Budget may seem slightly uneventful given the absence of any big-bang announcement. However, it continues to remain aligned with the government’s commitment to fiscal prudence and the same is expected to hold the Indian economy in good stead for the period to come.

What mutual fund investors should do?

Mutual funds investors can continue sticking to their target asset and category allocation plans for core allocations. At the same time, a mutual fund investor may seek to diversify their portfolio into a tactical component ranging between 15 percent to 30 percent of the overall portfolio, with higher allocation for a more aggressive and/or longer-term investor.

Considering the contents of the Budget, a mutual fund investor could seek to invest in highly promising sectoral funds, specifically investing in infrastructure or banking and financial services as sectors. For a slightly broader mandate, investors can look at promising thematic funds dedicated to themes like transport and logistics, manufacturing or broader consumption.