What Impact Will the Union Budget 2025-26 Have on the Equity Markets and Mutual Funds

One of the most impactful announcements was exempting individuals earning up to Rs 12 lakh annually (from the earlier annual income limit of Rs 7 lakh) from paying income tax under the New Tax Regime (the default tax regime).

This change comes at a crucial time when consumption growth has been subdued. By leaving a larger portion of the population with higher disposable income, the move is expected to stimulate households not only to spend but also to invest.

Sectors such as retail, media & entertainment, FMCG, consumer durables, automobiles, hotels, and travel & tourism among others are expected to benefit significantly as a result of this development. In turn, it could reflect positively on the stock prices of firms engaged in these industries with demand and revenues potentially picking up.

With greater disposable income and financial flexibility the middle class, in particular, may choose to allocate the additional funds into equity markets - either through lump sum investments or Systematic Investment Plans (SIPs).

Post the COVID-19 pandemic, we have seen large participation of households in the Indian equity markets. Currently, there are around 50 million unique households, which is 17% of all of India's households put together, who are investing in the Indian stock market, as per Ashish Chauhan, CEO of the National Stock Exchange (NSE). And with the equities having displayed their wealth creation potential notwithstanding the risk involved, going forward as well household participation in the stock market through direct equity and mutual funds is expected to rise.

The mutual fund industry has already been witnessing robust SIP inflows in recent years.

Even amid periods of intense volatility and market turbulence that marked CY2024, investors have largely remained committed to their contributions, with SIP inflows reaching a record high of Rs 26,459 crore in December 2024. The total SIP AUM today stands at Rs 10.72 trillion.

Exempting annual income up to Rs 12 lakh as announced in the Union Budget 2025-26 could further accelerate this trend. Households with excess cash may now step-up SIPs in the endeavour to build wealth and achieve envisioned financial goals sooner.

Furthermore, the introduction of a simplified Central KYC Registry process in 2025 could increase investor participation.

"The rollout of the revamped Central KYC registry in 2025 is a significant step toward streamlining investor onboarding, reducing redundancies, and enhancing transparency in financial transactions. This and the govt's continued emphasis on ease of doing business will create a more investor-friendly environment, making financial markets more accessible," said Mr Venkat Chalasani, CEO of the Association of Mutual Funds in India (AMFI).

Here Are Sectors Expected to Benefit from Union Budget 2025-26

• Consumption-Oriented Sectors

  The higher disposable income is expected to support growth and investments in consumption-related industries such as FMCG, consumer durables, automobiles, hotels, travel & tourism, lifestyle & retail, as well as media & entertainment.

• Infrastructure and Real Estate

  Finance Minister, Ms Nirmala Sitharaman announced the set-up of an 'Urban Challenge Fund' of Rs 1 lakh crore, aimed at turning cities into economic hubs while improving essential services such as water supply and sanitation.

  To support this, an allocation of Rs 10,000 crore has been proposed for the fiscal year 2025-26.

  In addition, each infrastructure ministry will present a three-year pipeline of Public-Private Partnership (PPP) projects. This is complemented by a proposed outlay of Rs 1.50 lakh crore for 50-year interest-free loans to states for capital expenditure and reform incentives.

  The real estate sector is also poised to benefit from the new budget provisions. With effect from April 1, 2025, taxpayers will be allowed to claim the annual value of up to two self-occupied properties as nil, without any conditions.

  This change is expected to boost homeownership by reducing the tax burden on individuals with multiple residential properties.

  Additionally, the budget has expanded the Special Window for Affordable and Mid-Income Housing (SWAMIH), with 40,000 more units set for completion in 2025 while 50,000 units have already been completed.

  This shall ease the financial burden on middle-income homebuyers repaying EMIs on loans taken for apartments while also paying rent for their current dwellings.

  To accelerate housing projects, the introduction of SWAMIH Fund 2, with an allocation of Rs 15,000 crore, aims to ensure the timely completion of another 1 lakh housing units.

  Infrastructure and real-estate-related stocks and equity mutual funds with exposure to such stocks could be beneficiaries of this initiative of the government. In turn, cement and steel manufacturers are also likely to see heightened demand.

• Manufacturing

  The manufacturing sector is expected to gain momentum following the government's announcement of a National Manufacturing Mission.

  Designed to further the 'Make in India' initiative, this mission aims to provide a comprehensive framework to support small, medium, and large industries.

  To enhance the productivity, quality and competitiveness of India's footwear and leather sector, a focus product scheme will be implemented. This scheme will support design capacity, component manufacturing, and machinery required for the production of non-leather quality footwear, besides the support for leather footwear and products.

  Similarly, the Union Budget 2025-26 plans to implement a scheme to make India a global hub for toys. This scheme will focus on the development of clusters, skills, and a manufacturing ecosystem that will create high-quality, unique, innovative, and sustainable toys that will represent the 'Made in India' brand.

  Given the above, industries such as footwear, leather, toys, plastics, and the ancillaries such as chemicals and adhesive industries are expected to do well with promising opportunities.

• Clean Tech Manufacturing

  The government also has its eyes on clean tech manufacturing with its commitment to climate-friendly development. So, this shall improve domestic value addition and build our ecosystem for solar PV cells, EV batteries, motors and controllers, electrolysers, wind turbines, very high voltage transmission equipment and grid-scale batteries.

  [Read: Top 5 Green Energy Mutual Funds]

• MSMEs and Startups

  The government has raised the investment and turnover limits for MSMEs, enabling more enterprises to qualify for sector-specific incentives and support schemes.

  The enhancement of the Credit Guarantee Cover from Rs 5 crore to Rs 10 crore and the introduction of customised credit cards with a Rs 5 lakh limit for micro enterprises is expected to provide businesses with the financial flexibility needed to expand operations, invest in technology, and drive innovation.

  This may attract investments into the MSME space looking to capitalise on emerging opportunities.

• Insurance

  The budget announced an increase in the FDI limit from 74% to 100%, subject to the condition that companies invest the entire premium within India.

  Additionally, the existing guardrails associated with foreign investments will be reviewed and simplified, which could encourage greater participation.

  This move is expected to attract higher capital inflows, increasing the competition, insurance companies may expand their operations, enhance service quality, and improve accessibility, particularly in underinsured markets.

The Downside of the Union Budget 2025-26

While the budget has many positives, it also raises concerns, particularly regarding its impact on the tax base and economic policy direction.

The decision to exempt income up to Rs 12 lakh per annum under the New Tax Regime, while beneficial to taxpayers, will shrink the tax base.

Lower direct tax collections could constrain the government's ability to fund large-scale welfare programmes and infrastructure projects in the long run. While this move could boost short-term consumer spending and investments, it raises concerns about fiscal sustainability over time.

There was no mention of the rationalisation of GST, as that is now a matter of discussion with the GST Council. Rationalising and lowering GST on certain goods and services actually could have left more money in the hands of citizens and pushed demand and consumption further.

The budgeted capex spend for FY26 remains largely unchanged from the previous year. A higher capex outlay could have amplified the multiplier effect, generating higher economic growth. Sectors such as railways and defence, which rely on government investment, haven't received much attention in the Union Budget 2025-26.

A constrained capex cycle and reduced tax collections may dampen investor sentiment, especially in sectors dependent on government spending.

While the government has targeted to bring down the fiscal deficit to 4.6% of GDP in FY 2025-26 from 4.8% estimated for FY 2024-25, it has come at the cost of holding back on critical capital expenditure - much needed to push GDP growth further up.

Another criticism is that the budget appears to have a political undertone, with a particular focus on Bihar, allegedly to appease the JD(U). In contrast, non-BJP-ruled states seem to have received comparatively less attention, sparking questions about equitable resource distribution and uneven pace of development across various states.

Global Headwinds in Play

As domestic developments unfold, we cannot overlook global factors that play a crucial role in influencing Indian markets.

U.S. President Donald Trump's renewed tariff threats continue to loom over global trade dynamics.

Although India has been excluded from the latest wave of tariffs and Trump has paused the tariffs on Mexico and Canada, continued tensions with China are keeping global markets unsettled.

Further, China's retaliatory tariffs could escalate into a trade war, fuelling worries about geoeconomic fragmentation.

Market sentiments have further been dampened by the expectation of a Fed rate cut by only 50 basis points, compared to the earlier anticipation of a 100-basis-point cut.

Other factors that would weigh on the market and inflict volatility in CY2025 include...

• Chances of inflation increasing due to higher tariffs

• Geopolitical tensions in many parts of the world

• The ongoing Russia-Ukraine war

• Limited room for central banks to cut rates

• Higher bond yields

• Weakening rupee against the greenback

• ...and more!

To Conclude...

The Union Budget 2025 introduced several reforms aimed at stimulating economic growth and increasing disposable income for individuals. Key sectors such as infrastructure, real estate, and insurance are expected to benefit from increased government support and capital inflows.

However, the budget also presents challenges by not giving enough attention to dependent sectors such as railways and defence, plus keeping capex largely unchanged.

The global uncertainties such as Trump's protectionist policies, ongoing geopolitical tensions, and diminished hopes of Fed rate cuts would continue to weigh on the market sentiment.

It is prudent for you, as an investor, to avoid impulsive decisions and choose worthy and most suitable mutual fund schemes that best align with your risk profile, your broader investment objective, the financial goal/s you are addressing and the time in hand to achieve the envisioned goal/s.

If you are in doubt as to how to go about with your investments now, consider consulting a SEBI-registered investment advisor who can help you build a well-diversified portfolio while ensuring regular reviews and rebalancing to navigate evolving market conditions effectively.

Happy investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.