Upcoming Lok Sabha Elections: Do They Warrant Any Change in Your Portfolio And Strategy?

(Source:https://www.moneycontrol.com/news/business/personal-finance/forget-elections-india-growth-story-will-carry-equity-markets-over-the-next-decade-11855331.html)

Note: The above returns are for the Sensex 30 Index

The above table shows how, inspite of the volatility, the stock markets have been buoyant before and after elections except for three occasions. On all three occasions, the markets were in the red due to reasons other than election results.

1.   In the one year before 14^th May 2009, the Sensex gave a negative return of 31.90%. During this period, the markets were dealing with the after effects of the US subprime crisis that blew up in 2008.
2.  In the one year after 6^th October 1999, the Sensex gave a negative return of 12.88%. During this period, the markets were dealing with the after effects of the dot com bubble that burst in 2000.
3.  In the one year after 23^rd May 2019, the Sensex gave a negative return of 20.97%. During this period, the markets were dealing with the after effects of the Covid-19 pandemic and the resultant lockdowns that were declared in March 2020.

Should You Change Your Investment Strategy During Elections?

In the above section, we saw how stock markets have given positive returns on most occasions, six months and one year before and after election results. There have been some instances of negative returns, but there were not because of election results. Hence, even though there is high volatility in the stock markets before and after election results, there shouldn’t be any change in your investment strategy.

Will the Election Impact Your Investments?

In the past, there have been instances when the election results have not been as per stock market expectations. For example, in 2004, the market expected the NDA Government to retain power. However, they lost, and the UPA Government came to power. Post results, it led to a big fall in the stock market. But, with time, the markets recovered and went on to make new all-time highs.

So, you should continue with your investments as it is in the run up to the elections and even after the results are announced. Rather than focusing on the short-term impact of election results, you should focus on your long-term goals. Continue investing through systematic investment plans (SIPs) towards your financial goals.

Nifty’s Wealth Creation Journey Amidst Elections

The Nifty 50 Index was launched in April 1996 with a base value of 1,000. As of April 2024, the index is trading around 22,500 levels. During this journey of 27 years, the stock market has seen several State Legislative Assembly and Union Elections. Several election results were contrary to stock market expectations and led to a lot of volatility and big corrections. However, with time, markets have always taken the election results in their stride and gone on to make new all-time highs.

During these 27 years, irrespective of election results and so many domestic and international adverse events, the Nifty 50 Index has multiplied investor wealth more than 22 times. The mid-cap and small-cap indices have given even better returns during this period.

Should You Make Changes in Your Portfolio During Elections?

In the earlier section, we discussed how you should not make any changes in your investment strategy due to the upcoming elections. But, should you make any changes in your investment portfolio in the run-up to elections? The answer again is "NO".

You should always follow asset allocation for your investment portfolio, irrespective of elections and other events. The asset allocation can be based on your financial goals, investment tenure, age, risk profile, etc.

For long-term financial goals, where the investment tenure is more than five years, it is recommended that you have higher exposure to equity mutual funds. Within equity mutual funds, you can focus on large and flexi-cap mutual funds. Where the investment tenure is in the 7–10 years range or even higher, along with large and flexi-cap mutual funds, you can add some exposure to mid and small-cap funds.

Along with equity mutual funds, you should have some exposure to fixed income and gold. Fixed income provides stability to your overall portfolio when equities are volatile and undergoing a correction. Gold acts as a hedge against inflation. It also acts as a safe haven during uncertain events like geographical wars, trade wars, pandemics, demonetization, etc.

Don’t Let Election Results Come in the Way of Your Long-Term Financial Planning

The Finance Ministry expects the Indian economy to grow from the current $3.7 trillion to $5 trillion by 2028 and further to $7 trillion by 2030. The Government expects India to become a developed economy by 2047, by when the GDP is expected to be $30-35 trillion. So, there is a massive runway for economic growth ahead for the Indian economy.

On the way to achieving these GDP numbers in future, there will be tremendous wealth-creation opportunities for equity mutual fund investors. Equities can help you create wealth and fulfil your financial goals. Hence, you should focus on your financial goals and continue investing towards them. Don't let the short-term volatility due to election results come in the way of your wealth creation. In short, the upcoming Lok Sabha elections don't warrant any change in your investment strategy and investment portfolio.