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An Election State Of Mind

Monday, May 13, 2019

Amar Pandit, Founder & Chief Happiness Officer,

It’s that time of the political cycle, where emotions are high, and expectations are in a frenzy. With elections currently going on, are you bracing yourself for the explosiveness of the market performance? The unpredictability of this 5-year phenomenon, generally, results in investors taking on one of the following roles:
The Wary: Stay away from all the uncertainty. Stay away from the market.

The Spectator: Keep calm and make investment decisions post the election results.

The Impressionable: Will select investment options depending on the party that comes into power.

The Skittish: Cash in the investments before the votes are cast.

Investors tend to view this period with a heightened sense of anxiety. History documents that during the previous elections, the markets either performed really well or crashed, but either way, investors witnessed a highly volatile market. Further feeding the nerves. But are all the nerves necessary?

Let’s look at the past performance of the markets during election years to understand the investors’ hesitation. In 2004 the BSE Sensex fell 11% in one day when the UPA Government unexpectedly won. In the 2009 elections, the market saw two upper circuits in a single day, when the UPA Government won with a clear majority. However, these market ripples were temporary. Irrespective of the short-term effects, the 5-year returns were around 15%.

Over the years, India has seen a mixed bag of government rules, from absolute majorities to coalition governments. The markets have rallied during each election, but what has emerged from each rule, is the average GDP growth of 6.2% since 1980. Thus, implying that if we grow at around 6% every year, the ruling government does not matter.

If you are looking to invest or change your investments in mutual funds during the elections, follow a systematic way of selecting your funds and setting your investment horizon.

When selecting a mutual fund, select one where the fund manager maintains a neutral portfolio. By a neutral portfolio, we mean, that when the market corrects, the portfolio will correct, but in general, the portfolio does not align itself to any one sector. The fund is neutral to the political scenario and elections, only focusing on good companies and good returns. This may seem obvious, but how will you identify whether a fund is neutral or not? Look at the past performance of the companies and industries that the fund invests in. If these companies have thrived under different governments, different cycles of the economy, then you have a winner on your hand! If the companies have outperformed under one government rule, but rallied under another, then you probably should choose not to invest with them at this point.

The key is to not look at short term investments. Holding an investment for a shorter period of time during an expected, yet unexpected, market phase, could put you in the negative. When you are making long term investment decisions, you need to give space and time for the market to correct itself and adapt to the new government’s policies and governance.

Since timing the markets at this point is tricky, you should look at investing through SIPs. When you hold the SIPs for a 3-5-year period, the highs and lows average each other out with time. In this manner, you are eliminating the effects of volatility and areprotecting yourself from being at the receiving end of the brunt.

Drop the worry hat and invest in mutual funds by looking at the growth of the companies and not the government. However easy it may be to get swayed by your emotions, avoid impulsive investment decisions. Don’t try to call the elections, call the fund. Happy Investing!

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