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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Election or not, equity always emerges the winner

Whatever be the outcome of the election, investments in good stocks pay over the long run

In a recent interview with an Indian business daily, legendary investor and commodity guru Jim Rogers was asked about the Indian elections. He stated that he had “not seen any good Indian government for a long time, as India’s debt situation continues to mount, higher inflationary pressure persists and the balance of trade continues to get worse".

Can’t disagree with that, but Indians are hoping that this time around it will be different.

Whichever party comes to power will have the same basic economic issues to deal with—improving supply side dynamics to tame food inflation, boosting investment in infrastructure, and tackling daunting structural reforms such as modernizing labour and land laws. As for the fiscal deficit, it seems to be better now than the last year, but any volatility in capital flows can quickly change that.

Having said that, it is impossible for financial market participants to predict the outcome of the elections; only some crystal ball gazers will venture to make such a call with certainty. But whatever be the final result, it will undoubtedly impact the direction of the market. For instance, if the perception is that the government elected to power has an anti-growth stance, it could give the impression of the Indian equity market being over-valued leading to a market correction post elections.

I am often asked: as an investor, should I pull out of the market before the elections? The logic is that if the market tumbles post elections, the investor would be able to pick up stocks at cheap valuations. But if there is a rally, she may miss it.

I am not going to answer the above question directly because, like I said earlier, it is impossible for anyone to make a call on the election outcome and the consequent direction of the market.

In 2013, there was a pall of gloom hanging over Indian investors as the market reeled under talks of tapering by the US Federal Reserve. It sent the rupee crashing in an economy that was already battling with a slowdown. However, in the same year, the market soared to record high levels.

Those who pulled out on the back of bleak news would have missed out on the current rally. And those who stayed away during the downturn would have missed out on the opportunity to buy stocks at low valuations. And, face it, last year was not the first time that the stock market received a sound thrashing only to bounce back again.

So, what am I trying to say? I believe that the principles of investing do not change, irrespective of the economic or political conditions.

•Equity as an asset class cannot be ignored. However dismal the political scenario and however volatile the economic environment, there is no denying that millions of Indian investors are under-invested in equity. This asset class cannot be ignored by any long-term investor who needs to beat inflation and accumulate wealth. Equity is also a must in any retirement planning portfolio.

•Invest systematically and the volatility of the stock market won’t affect your investments. Opt for well researched and consistent equity mutual funds. Don’t let emotions dictate your actions during market upheavals.

•Take a good look at your risk profile and tolerance and invest in equity funds accordingly. If you can handle more risk, include a mid- and small-cap fund.

•Diversify, not only among asset classes but also among geographies. Invest in global funds as well.

•Do not flee from equity simply because it is volatile. Last year, even the debt market experienced volatility. It is the most convenient and profitable way to participate in the economy’s growth.

It is also the best way to beat inflation and build wealth. The tax advantage adds to the appeal—long-term capital gains tax is nil. Take into account the transactional ease, liquidity and the low investment threshold and few asset classes come close.

Stay focused. Whatever be the outcome of the election, investments in good stocks pay over the long run.

Aditya Agarwal is managing director, Morningstar India.

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