Tax tension drags Sensex down 600 points but retail investors keep partying. Should you tweak strategy?

Sensex was down around 600 points as heavyweights HDFC Bank, ICICI Bank, Axis Bank and Bajaj twins led the downside with losses going up to 3%, the Nifty Smallcap250 index was up 1.4%, the midcap index was also up around 1%. Gains were even higher in microcaps, the index of which rallied over 2%.

While the increase in tax rates for short-term as well as long-term for equities is a clear long-term negative, the quantum of hike is marginal.

“It is a very mature market and has absorbed this shock. One day before the Budget, if you had asked that if taxes are raised, would the market correct, everybody could have told you the market could correct 5%-10%,” said Sandeep Tandon, CIO, Quant Mutual Fund.

Dalal Street veteran Raamdeo Agrawal reminded investors that the Budget has raised only the tax while capital gains are intact.”Steady earnings growth coupled with a low probability of major valuation de-rating imply steady capital gains. So what if the tax on the same is a bit higher? The party continues,” he wrote in a column on ET.Back in 2018, when the government raised the long-term capital gains tax from 0% to 10%, markets corrected 10% over a two-month period.”Over the longer term, as long as India keeps growing at ~7% (real GDP) and earnings keep compounding at 15-20%, equity flows should remain strong,” said Suresh Ganapathy of Macquarie while stressing that the Budget had no outright populist moves and the focus on jobs and capital expenditures were maintained.

With sustained focus on capex, rural economy, energy transition and fiscal consolidation, Prabhudas Lilladher said it sees no major change in market outlook in a normal monsoon year.

“We remain structurally positive on Indian markets given superior growth, strong fiscal condition, normal monsoons and expectations of interest rate cuts in 2H25. We remain positive on Capital Goods, Infra, Healthcare, Auto, Ports, Cement, Private Banks, AMC’s, Tourism and select consumer segments,” Prabhudas said.

Going forward, focus will shift back to ongoing earnings season, distribution of monsoon and global cues like expected interest rate cuts from US Fed and changing political scenario in the large developed economies.

“We continue to remain constructive on sectors such as auto, auto ancillary, NBFCs, IT, pharma, power utilities, metal products, EPC, water treatment, railway wagons, etc with medium to long term investment horizon. Investors are recommended to tone down the return expectations for the remaining part of FY25 and continue to adopt buy on dips strategy with investment horizon of at least 18-36 months,” SBI Securities said.