Elections in large democracies such as India tend to bring about a period of uncertainty and volatility in the financial markets as well as in the overall economy. The Lok Sabha election of 2024 is expected to be no different, as market participants keenly watch for any shifts in political power that might affect economic policies and investor sentiment.
For mutual fund investors, understanding the potential impact of election results on their portfolios is crucial for making informed decisions.
Yogesh Kalwani, Head of Investments at InCred Wealth, emphasises the inevitable volatility around election results. He notes, "The market will be volatile, and we could see sharp moves on either side based on the election result outcome. However, in the long term, markets mirror corporate earnings growth."
This highlights a critical point for investors: while short-term market reactions can be unpredictable and sharp, long-term investment returns are more closely tied to the fundamental performance of the companies in which mutual funds invest.
Kalwani advises investors to adopt a long-term perspective, ideally a three-year-plus investment horizon, particularly in equity mutual funds. This approach helps to mitigate the impact of short-term volatility and allows investors to benefit from the underlying growth in corporate earnings. Given the current market conditions and premium valuations, he suggests that staggered investments can be a prudent strategy to average out purchase costs over time.
Ankit Jain, Senior Fund Manager at Mirae Asset Investment Managers India, concurs with the long-term perspective. He states, “Stock market does react in the short term to election results but that should not have any impact on long term investments such as mutual funds. Mutual funds invest in stocks based on their fundamentals and growth story, which will remain the same irrespective of the election result.”
This viewpoint underscores the importance of focusing on the fundamental strength of the businesses within the mutual fund portfolio rather than trying to time the market based on election outcomes.
Jain further explains that the Indian economy is on a robust footing, supported by strong policy measures from the current regime. He believes that continuity in these policies will provide a clear growth trajectory, regardless of the election result. Therefore, he advises investors to remain invested and avoid making hasty decisions based on short-term market movements.
During periods of uncertainty and market volatility, maintaining a diversified portfolio and adhering to a disciplined asset allocation strategy become even more critical. Nilesh D Naik, Head of Investment Products at Share.Market, stresses the importance of a long-term perspective and a well-diversified portfolio.
He notes, "While from a short term perspective, an unexpected, adverse election outcome can potentially impact markets and in turn your portfolio, historically we have seen that such market corrections tend to be short lived, especially in high growth and fundamentally strong economies like ours."
Naik’s advice is to ensure that your portfolio is well-diversified across various asset classes and sectors, which can help manage risk and reduce the impact of any adverse market movements. He also highlights the importance of aligning your portfolio with your risk appetite, which means balancing equity investments with more stable asset classes like debt to cushion against market volatility.
Vinnaayak Mehta, Founder of The Infinity Group, points out the significant growth potential in mid and small-cap sectors. "There are opportunities in the mid and small cap sectors, which offer significant growth potential," he says. Mehta advises investors to adopt a flexi cap strategy, which allows fund managers to invest across different market capitalizations based on where they see the best opportunities.
This approach can help maintain a balanced investment portfolio and capitalise on the growth potential of smaller companies. However, Mehta cautions that new investors, especially those who entered the market post-COVID-19, might not have experienced market corrections before.
"Since market movements are cyclical, errors during corrections can lead to substantial losses for inexperienced investors," he warns. Hence, thorough research and effective risk management are crucial before making investment decisions in these sectors.
Given the anticipated volatility around the election results, investors might consider more flexible and balanced mutual fund products. Kalwani of InCred Wealth expresses a preference for flexi cap and multi cap funds, where fund managers have the flexibility to build portfolios across different market capitalizations based on where they see opportunities.
Additionally, he recommends balanced advantage funds, which dynamically adjust the allocation between equity and debt based on market valuations and trends. "Investors should stick to their asset allocation and rebalance their equity portfolio if they see good returns," he advises.
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