How to leverage election year market crash and gain on averaging opportunities

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New Delhi | Published: October 10, 2018 1:05:10 AM

Lok Sabha elections due next year, it is more important to hold on to stocks, buy more on dips and continue with SIPs.

The losses in the equity markets would prompt many investors to sell. (Illustration: Shyam Kumar Prasad)

For most investors in the Indian equity markets, the current year has been topsy-turvy. Since the beginning of September, the 50-share Nifty has dropped 11.5%—the worst performing equity market globally—as investor sentiments were impacted by weakening macros, tight liquidity conditions, IL&FS default, and already stretched valuations.

The losses in the equity markets would prompt many investors to sell. Those who have started investing in the last leg of the rally, especially through the mutual fund route, would be contemplating to either stop or put a pause on their systematic investment plan (SIP). However, experts suggest that one should hold on to equity investments and never stop SIPs. With

Lok Sabha elections due next year, it is more important to hold on to stocks, buy more on dips and continue with SIPs.

Positive gains in pre-elections

A study based on election data done by Sanctum Wealth Management shows that investors rarely lose money investing pre-elections. Across seven elections in the last 27 years, whenever an investor entered the markets six months before the general elections and held on for two years, the investor made on average annualised returns of 23%, the study says. The largest gain of around 52% was made in the 2009 elections when the UPA government was in power. The least return was 1.5% in 1999 when the BJP won.

“The trends strongly implies that the 27-year track record has never yielded principal erosion when entering pre-elections. Net-net, irrespective of the incumbent government remaining in power or a change at the Centre, markets have shown resilience in the periods encompassing general elections over the past 27 years,” says Sunil Sharma, CIO and ED, Sanctum Wealth Management.

Value in large part of the market
After the corrections, the risk-reward balance has become reasonably attractive. A report by Kotak Institutional Equities Research, however, cautions investors noting that the Indian market may face turbulence over the next 2-3 quarters with stock prices being dictated by unfavourable global macro, weak domestic macro, government actions and uncertain politics rather than the underlying fundamentals and fair value stocks.

“The market indices have fallen to a lesser extent over the past few months compared to the larger declines in prices of most stocks in the broader market. A few large-cap stocks in the IT, metal and pharmaceutical sectors, largely linked to rupee weakness, have held up relatively well in the recent market mayhem,” the report underlines.

Continue SIPs despite NAVs falling
When the markets fall, just do not panic and sell or discontinue your mutual fund SIPs. If you know why you invested in a particular stock and if the stock’s fundamentals are fine, continue to hold. If you are not convinced about the fundamentals, then you can exit. Similarly, do not stop your SIP as it will defeat the rupee-cost averaging, one of the greatest benefits of SIPs.

Retail investors should not time the market and, instead, invest through SIP of mutual funds. Investing a fixed sum regularly in a SIP will average out the cost of acquisition by purchasing more units when prices are low and lesser units when prices are high. This will better your returns over the long-term by averaging out market volatility. When the markets are down, it is common for retail investors to opt out of SIPs. Instead, one should invest a fixed sum regularly and gain on the averaging opportunities during a market crash.

Brijesh Damodaran, managing partner, BellWether Advisors LLP, says for most investors, the gains in equity market over the last 18 months have been wiped out. “In such a scenario, it is important to have the asset allocation in place right at the time of beginning of the investing journey. Also, short volatile phases should be looked at as an opportunity to increase equity allocations from a medium- to long-term perspective,” he says.

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