With just 6 months left until elections investors are trying to brace themselves from knee-jerk reactions of the market. But will the elections really make an impact when it comes to mutual fund investments?
Elections decide the fate of the country
Elections that come once in 5 years decide the fate of the country for the next 5 years. The party that forms the government gives us an idea how about how the policies will be framed. However, one can only forecast the functioning of the market but cannot tell for sure how the market will turn out. That solely depends on the performance of the government and the decisions it takes concerning several economic policies like fiscal policy, corporate growth, monetary policy, and infrastructure development.
Research shows markets were highly volatile during elections
According to research done by ET Mutual Funds, the market moved up during 3 out of 5 elections in 2014, 2009 and 1998. In the 2004 and 1999, the markets fell down. Nevertheless, all the elections saw a highly volatile market. There are always two sides to a coin. Investors who believed in a party that formed a government and the investors who didn’t believe in a party that formed the government. Markets saw a wave of positive emotion when the government was formed by the party that they believed in leading to higher investments in the market. Hence higher returns. Government’s functioning leading to positive growth in the macroeconomic factors have strengthened the trust of investors in the government.
Elections have previously created all types of havoc in the country right from depreciating rupee, rising crude prices, dull or enhance market sentiments in the short-term, trade wars, depleting foreign reserves, inflation and so on. But all this was in the short-term. Long-term investors need not worry about their investments.
A positive sentiment is seen in the year preceding the election
Looking back at the history, the majority of the times the market has been in an increasing spree the year before the election. Both Sensex and Nifty have given good returns in one year preceding the election in 2004 and 2014. Global financial crisis (2008) can be one reason that the market fell the most before the 2009 elections. Hence it can be concluded that majority of the times a positive sentiment is seen in the market the year preceding the election.
|Election Date||Election Year||Sensex||Preceding Year||Sensex||Return|
|April 20 - May 10, 2004||April 19, 2004||5800||April 17, 2003||2984||94.37%|
|April 16 - May 13, 2009||April 15, 2009||11284||April 15, 2008||16153||-30.14%|
|April 7 - May 12, 2014||April 4, 2014||22359||April 4, 2013||18509||20.8%|
|Election Date||Election Year||Nifty||Preceding Year||Nifty||Return|
|April 20 - May 10, 2004||April 19, 2004||1844||April 17, 2003||940||96.17%|
|April 16 - May 13, 2009||April 15, 2009||3484||April 15, 2008||4879||-28.59%|
|April 7 - May 12, 2014||April 4, 2014||6694||April 4, 2013||5574||20.09%|
Extreme volatility in the market right after the election
The market has seen a positive sentiment the year preceding the elections but what happened once the elections have been done and results are declared. The below table shows the market returns in the two months after elections.
|May 11, 2004 - July 12, 2004||-7.16%||-8.39%|
|May 14, 2009 - July 14, 2009||16.68%||14.41%|
|May 13, 2014 - July 14, 2014||4.76%||4.86%|
The markets were very volatile right after the elections results were declared. They didn’t seem to stabilize even after two months.
There was extreme volatility in the market right after the election. The market either moved up a lot or went down a lot in the two months after elections. The gains or losses during this period are short-term. Given below are the CAGR returns from Sensex and Nifty during the government’s rule. The market has been performing well and giving healthy returns in the long-term. Despite the result of the election and the volatility in the market before, during and after the election the markets have been performing exceptionally well.
|CAGR||Sensex Returns||Nifty Returns|
This shows that the short-term volatility in the market shouldn’t affect investor decisions if they are planning to invest for a long-term. Also, considering the fact that investing in mutual funds should be done with a long-term view and looking at the returns from the market in the long-term, it is pointless for mutual fund investors to worry about how the elections will affect their investments.
Until and unless there are major changes in the mutual fund, the investor need not worry about redeeming their investment. For example, changes in the mutual fund’s strategy or the fund manager or the fund’s performance are consistently negative. However, investors need to review the mutual funds in their portfolio once a year.
What should investors do?
There are long, medium and short-term investors. If looking at a long-term, approaching systematically at their investments. Sticking to the original strategy and asset allocation is recommended. Avoid lump sum investments right now. Sticking to SIP investments is better as the market is highly volatile right now. If one is planning on investing a lump sum amount for long-term it is better to invest 20-25% of it right now. The rest can be gradually invested. But more than gradually infusing money into the market, an STP is recommended. Invest the entire amount in a liquid fund right now and do an STP into equity funds. This is similar to investing in equities through SIP.
But investors are not just long-term, there are short and medium term investors too. It is always better to stay away from equities in the short-term as they are high-risk instruments. In the short-term, money market and debt funds are highly recommended. In the medium-term a balance of equity, debt and money market instruments is an ideal asset allocation strategy.
When is the right time to invest?
Now is the perfect time to invest if you haven’t already started investing. It is pointless to time the market to start investing. In a volatile or a non-volatile market timing of the market is difficult. If you are looking at doing a SIP then starting right now is advisable. Invest in funds that best suit your financial condition.
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