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Investment portfolios are subject to legislative risks as the govt. can make sudden changes

The government can amend rules and regulations or even bring in new laws. Some of these could come at an unexpected moment. When these legislations or rules come into force, there is a possibility that our investment strategy and existing portfolio could be impacted.

Some such key measures that have impacted our financial, investment and wealth creation habits include demonetisation, extending the tenure of long-term investments for debt funds from one year to three years, and abolition of wealth tax, estate duty, Land Ceiling Act and Gold Control Act.

A friend’s daughter was to have her arangetram ( maiden Bharatanatyam performance) a few days after demonetisation was announced. As some of the musicians had insisted on cash payments, my friend and his family had to spend hours outside banks and ATMs to source cash for the payments.

Time and again we have been witness to such legislations. In all these situations, the damage or the benefit to our portfolio has been sudden.

Sometimes, there is a direct impact of such legislations on our investment portfolios and sometimes it is indirect. For example, when the government decided to offer textile mill lands for construction purposes, the real estate market underwent a change.

While that was a direct benefit, the indirect one was that an entirely new business district was created, jobs were generated, and several other industries received benefits.

On the other hand, when the capital gains structure of debt-based mutual funds was amended, debt-based mutual funds took some beating, while there was benefit for bank fixed deposits (FDs).