Modi or not, here’s how stock market investors can make election-proof portfolio

Updated: May 13, 2019 11:15:50 AM

Amidst the political fervour, there is one demographic who is biting away at their nails for an entirely different reason - the fluctuating market.

Modi rally live today, PM Modi, Narendra Modi, Ayushman Bharat card, Lok sabha elections, general elections, india newsEvery time during Lok Sabha elections, the markets are in a flux and understandably so, for the winning political party will affect economic policies.

The Lok Sabha elections 2019 commenced last month in India, and the final leg of polling is scheduled to be conducted on May 19. Amidst the political fervour, there is one demographic who is biting away at their nails for an entirely different reason – the fluctuating market. The question remains, should mutual fund investors really bother about market commotion and change their investment strategy? Let us find out.

How important are elections to stock market performance?

Every time during Lok Sabha elections, the markets are in a flux and understandably so, for the winning political party will affect economic policies, corporate growth and infrastructure development. However data from the previous years’ elections indicates that though there are frequent ups and downs in the market during and following the elections resulting in short term gains or losses, but in the long run, markets do deliver healthy returns.

Below are the CAGR returns for Sensex and Nifty during the past three government tenures which just prove how the stock market stabilises despite the electoral outcome.

CAGR Sensex Returns Nifty Returns
2004-0916.62%16%
2009-1426.97%25.81%
2014- 201815.77%15.81%

Since there are so many factors at play and there is little long term impact on stock market returns, it is futile to wrack your brains around predicting the elections or the market and knee jerk reactions to altering your investment strategy should be avoided at all costs.

What should you do as an investor?

If you are a long term investor, worrying about market volatility due to elections or other events is futile as no one can predict how the markets will fare in the short term.  In the long term however, markets have done well despite bad government policies, natural disasters and even wars.

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Successful investors realise that market volatility is a feature of the stock markets and not a bug. Volatility creates the risk that ultimately rewards the steadfast investor with inflation beating returns. If there was no volatility, stock market returns would have converged to FD returns.

Ideally as an investor you must always invest according to your true risk profile and your financial goals. Once you have done that, it’s time to turn off the news. Stick to your original investment plan and asset allocation and review it periodically – elections or no elections

You don’t have to resort to redeeming your investments unless there is a change in the fund manager’s strategy or the fund’s performance has consistently been poor, in which case you should anyway consider rebalancing your portfolio to better performing funds.

Another important tip would be to refrain from making huge lump sum investments in a volatile market in one go – it is better to spread it over 4-6 months in order to average out the purchase price. Alternatively, you can invest the entire amount in a liquid fund right now and then opt for systematic transfer plan to divert money into equity funds over a period of time later.

If you are a short term investor, staying away from equity funds would be a wise move , unless you want to gamble with your hard-earned money. In the short -term,investing in debt and liquid mutual funds is recommended over equity funds.

Medium term investing is the trickiest but here as well the best course would be to invest according to your goals.Investing in a mix of debt and equity according to your risk profile with periodic rebalancing of debt and equity allocations is recommended. Taking risk as per your risk appetite and investment horizon is the best way to election-proof your portfolio. And this applies to any other political or economic event as well.

Is there a perfect time to invest?

If by perfect you mean guaranteed returns then no there is not. Waiting for the perfect time will just result in you standing at the side-lines.  At any point there will be both good news and bad news. Just remember that our country has survived in varied economic climates, unexpected poll results, crests and troughs in currency value and crude prices, and yet is resilient enough to maintain a steady GDP growth. Any time is a good time to invest as long as you are doing it with proper planning.

The election hullabaloo should not be a spirit dampener for long term thoughtful investments. Rather than fretting over market movements, concentrate on having clarity of financial goals, your risk profile and your investment horizon. Thereafter, either through careful self analysis or by seeking professional help from a financial advisor, build a portfolio that diversifies your risk, then review your investments periodically to stay on track to achieving your goals.

(Ankur Choudhary is the Co-Founder and CIO of Goalwise. The views expressed are author’s own.

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