Last year on Feb. 28, 2013, the Union Budget was announced at 11am IST. Of course, this is during market hours and despite traders being fully aware that wild swings in the market are to be expected, the markets have a way of luring investors and traders to participate in these opportune times.
On the 28th of February, the Sensex opened at 19,264; it ended up hitting a low of 18,793 before closing at 18,861.
Keeping in mind that there no shift in government, we still ended up seeing the Sensex drop by almost 500 points. If today's Railway budget is an indication of things to come (the Sensex fell 517 points), then on 10th July when the Union Budget is announced, we are in for a very volatile day.
So the natural question arises: as a trader or investor, how should one take advantage of such a volatile market?
Firstly, it's important to be well-informed as to what the markets are expecting out of the Union Budget. There are plenty of articles you can read up on prior to the Budget. Instead of looking at the Budget from a stock specific angle, try to break it apart into sectors. How are export driven sectors expected to react to the Budget? From a taxation point of view, which ends up dominating large parts of the Budget, how will it affect the overall market and different sectors?
Let's take the Defense sector as an example. It is well known that the Modi government is keen on allowing FDI to enter the market in certain sectors only. Being a business friendly government, it is expected that the defense sector is likely to get to go ahead to allow 49% stake from foreign direct investments. Keeping this in mind, a keen trader will look to build a basket of stocks comprising a defense sector portfolio. As the Budget is being announced, a trader could look to buy or sell his basket (or select stocks that he feels are over-priced or under-priced compared to their sector counterparts) with only limit orders (avoid using market orders during volatile market conditions).
Another way one can profit from the Budget is to look for cues that despite what's being said, the overall market would benefit. Let's take the securities transaction tax (STT) as an example. There are heavy talks that the Finance Minister is strongly considering lowering STT in order to increase investor participation, especially in the equity segment. If this is announced, you can bet that the markets will rally upward. Once again, ensure that you place limit orders and do not hesitate to exit your positions once you have earned a decent profit.
Finally, regardless of whichever strategies you opt for, ensure that you use a stop loss order and profit objective order with all your trades. This is called using proper Risk Management. This will eliminate the worries of minimizing your losses and knowing exactly how much you're looking to earn on each trade.
The Union Budget is bound to create volatile market situations. Ensure that you're well prepared, equipped with the right tools, and you might find yourself being able to take advantage of these opportune occasions.
(Contributed by Raghu Kumar, co-founder, RKSV)
