Budget winds fill the sails of retail investors. Will it last?

A Mint analysis of 1,957 companies shows that individual investors (holding nominal share capital up to ₹ 2 lakhs) increased their ownership in approximately 51% of these companies between the September and December quarters. This compares with nearly 49% of stocks that saw a sequential rise in stakes in the previous two quarters. These 51% of companies saw a median return of 0.2%, contrasting with a slight 0.5% decline after the previous budget. 

Among the stocks that experienced an increase in retail ownership on a sequential basis, almost 50% saw a rise in their stock prices on Budget day, extending gains up to 20%.

This positive market reaction after the budget announcements was only the third since 2019, including interim budgets, for retail investors. The only other two times retail investors saw positive median returns on their stock picks after a budget were during the pandemic years of 2021 and 2022. Government measures like MSME loans, increased state borrowing limits, farmer credit, and migrant food support boosted market confidence in those years, resulting in 5% and 1.5% gains for the Sensex, respectively, a welcome reversal of the typical muted or negative market reactions to past budgets.

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While the budget can influence investor sentiment, retail investors typically increase their holdings based on factors such as attractive valuations, strong fundamentals, and technical trends. The analysis revealed mixed median returns over the years, demonstrating that while some stocks may benefit from post-budget momentum, others can experience corrections.

"The retail investors tend to increase their holdings in certain stocks ahead of the Union Budget, anticipating major announcements and a highly populist approach. This behavior mirrors trends seen before earnings seasons and other key events, as investors speculate on potential policy impacts to capitalize on short-term gains," said Nirav Karkera, head of research at Fisdom.

"However, once the budget is announced and the event passes, the market often normalizes, leading to a correction in stocks that were driven up by pre-budget speculation," he added.

Analysts have, however, highlighted the speculative nature of trade in stocks with high retail participation. "Speculative trading based on expectations and rumours inflates stock prices before the announcement. However, if the Budget fails to meet expectations, these stocks often face sharp sell-offs, triggering volatility," highlighted Ravi Singh, senior vice president of retail research at Religare Broking. “Many retail investors also book profits after witnessing gains, exerting downward pressure on prices as they liquidate holdings."

Sonam Srivastava, founder and fund manager at Wright Research, said market reactions on budget day tend to be mixed. "While 2021 saw strong gains, other years—including today—have been flat, suggesting that speculative pre-budget buying does not always translate into post-budget gains. Stocks with higher retail participation often underperform as investors book profits or react to unexpected policy outcomes," she noted. 

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Going forward, this trend may persist, but with increasing retail maturity and data-driven investing, we could see a shift towards more informed decision-making rather than event-driven speculation, she highlighted further.

A closer look at stock movements, based on the magnitude of retail investment, offers a more nuanced perspective. Sample this.

Stocks where retail investors increased their stake by more than 10 percentage points between Q2FY25 and Q3 FY25 saw a median budget of 1% compared to a year-to-date return of -4.2%. Stocks with a 5-10 percentage point increase in retail ownership recorded a return of 1.1% on the D-day but have given a contracted median return of 8.2% so far. Companies where stakes were raised between 2 and 5 percentage points posted a decline of 0.2% on budget day and 11.4% decline year-to-date returns.

These figures reinforce that stocks favoured by retail investors leading up to the budget do not always translate into immediate positive returns.

The ₹12 lakh tax exemption, providing welcome relief to the middle class and having the potential to stimulate consumption, likely contributed to the impressive gains seen in consumer-centric stocks. Companies like Blue Star and Godfrey Phillips, where retail shareholdings inched up by 30 basis points, saw their stock prices rise by over 10%.

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“To better align their strategies with market realities, retail investors should focus on long-term fundamentals rather than reacting to budget announcements. Diversifying their portfolios across sectors can also help reduce risk, especially since the immediate market impact of budget measures can be unpredictable," noted Singh.

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