Macro Moves

Effect of budget 2023 on Institutional Investor

Created on 01 Feb 2023

Wraps up in 5 Min

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We all must have been a part of stories and tales that our grandparents narrate during the winter holidays while soaking up the sunlight on every bright sunny day and no wonder that as soon as the new calendar replaces the older one in our grandparents almirah one of the buzzing topic of discussion they bring out is the changes that the upcoming budget will bring about.

This article's main goal is to help readers understand how budget decisions affect institutional investors thus understanding institutional investors should be our first step. Let’s get started

Who are Institutional Investors?

Institutional investors, to put it simply, are businesses that pool money on behalf of others and invest it in a variety of different financial products and asset classes. Investment banks and hedge funds are among them, as are insurance funds, pension plans, and investment funds like mutual funds and ETFs. 

Institutional investors are therefore groups that pool resources, control the purse strings and exercise financial control over the distribution of total assets. Given that, it is simple to comprehend that their presence or absence generates or drains a significant amount of liquidity, which in turn increases volatility. 

Broadly classifying Institutional Investors can be divested into 2 categories-: 

  • Domestic Institutional Investors- Institutional investors who invest in securities and other financial assets within their own country are referred to as domestic institutional investors. Example: LIC is one of the biggest DII for India.
  • Foreign Institutional Investors- Foreign Institutional Investors (FIIs) are organizations that collect funds from various sources and invest them in the financial markets of other nations. To diversify their holdings geographically and to mitigate the risk of currency fluctuations, FIIs invest in assets from other economies.

Now that we are reasonably familiar with the identities of DII and FII, let's delve into our subject and comprehend how the budget affects institutional investors.

Effect of the Budget on Institutional investors

1. Revamping Sector Allocations: Institutional investors are a group of people who do not have a reductionist mindset; they purely work on the arithmetic that the government allocates to different sectors and the fiscal deficit numbers. The outcome of all the policies that the FM presents during the budget event results in portfolio churn for them; they exit some sectors and enter others. For instance, to substantiate the point, the FM stated in the 2023 budget speech that capital investment outlay will increase by 33.4% to 10 lakh crores. It goes without saying that this government capital expenditure has a last-mile impact on shares of the infrastructure companies and also has a multiplier effect that could result in explosive growth in the years to come for sectors like Engineering, Construction & Building materials companies like Cement.

2. Policy Disruptions: Various amendments to existing rules and regulations are made during the budget, as well as policy inclusions/ deletions may disrupt the current flow of operations for a few Institutional Investors. "Markets don't like instability and uncertainty," explains Peter Mandelson, placing this into perspective. The changes made in budget 2020 with respect to dividend income that unitholders will earn was one such policy disruption. Dividends would be added to income and taxed according to the investor's income tax slab according to the Budget 2020 proposal. Mutual funds were required to pay dividend distribution tax, or DDT, on dividends issued by them under existing rules. This, to some, was an advantage whereas, to those who were in the highest tax slab, this became a drawback because now they have to pay tax @ 42.7 % including surcharges and cess. Post this announcement the AUM for Dividend distribution mutual funds has suffered.

3. Volatility: A Boon or a Bane- Institutional investors are larger participants who handle billions of dollars in investments and hence have a huge treasure trove and are market liquidity generators. They serve as both demand and supply generators. FIIs have been mostly selling Indian equities over the last year and a half due to concerns about global economies, and no surprise, the feeling remained the same in January, but happily, DIIs have filled the void. The government can relax certain standards and influence the overall way DIIs and FIIs look at a sector through the Budget. In the previous budget, our FM increased FDI investment in the insurance sector from 49% to 74%, which will boost investments from institutional investors in the coming years and help them form meaningful Joint Ventures with Indian companies to tap the unexplored areas in the Insurance sector. Going forward, the government may consider allowing 100% FDI.

4. The Parag Parikh Fiasco: To comply with regulations, our stock exchange's watchdog advised mutual fund houses last February to halt accepting subscriptions in schemes that invested in overseas shares, and an aggregate limit of $7 billion was allowed in foreign stocks, with an additional $1 billion allowed in ETFs.The fund was the best Flexi Cap fund until then, outperforming peers and its benchmark NIFTY 500 TRI, but since the regulation came in, the situation has turned upside down because the fund which objectively aimed at exploring foreign opportunities could no longer invest in FAANG or other foreign stocks. Sadly, the fund's overseas portfolio has indeed fallen very sharply, and in order to comply with the regulator, it was unable to average out its investments. As a result, the fund's performance over the course of the past year has been poor, providing investors with minimal negative returns, but tough times don't last long and the industry is expecting the fund to bounce back for its committed investors.

The Bottom Line

What is comfortable in investing is rarely profitable, according to Robert Arnott. Can you endure staying behind after everyone else departs? Institutional investors have always had more breathing room to deal with budgetary setbacks, and they have also been very opportunistic to pour money into the market when the budget was in their favour, whether it was the year that our FM decreased corporate taxes or any other occasion. Budget 2023 contained a lot to excite retail investors, but very little that could be of interest to or affect institutional investors' positions. Probably the FM did not want to risk it any further given the level at which our indexes are placed because FIIs had already divested into other economies offering reasonable valuations in the previous year.

What did you find most exciting in our finance minister's speech on the budget 2023? 
Let us know in the comments section below.

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Aakarsh Bedi

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Aakarsh is pursuing his post graduation from N.L. Dalmia Institute, Mumbai with his major specialization being accounting and finance. His curiosity for content writing has made him put together series of articles for diverse magazines. He considers penning down his thoughts as a soul relieving activity.

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