Markets Fell due to Election Results: Should You Continue Your SIP or Accelerate Your Investments?

Note: The 5-year returns are annualised

The above table shows how even though the markets fell sharply on the election results day, over the next one and three months, the losses narrowed. In six months, the markets recouped all the losses and were up by 10%. Over one year, the market returns were a good 19%, and over five years, the annualised returns were a good 17%.

Should You Start an SIP on Election Results Day?

As per Value Research Online data, if an investor had started a SIP on 13th May 2004 in the Sensex, they would have earned an 18.1% CAGR over 5 years. Thus, even though the market may react negatively in the short term, over the long term, the fundamentals of the economy kick in accompanied by sustainable growth. Below is the data on how a SIP started on an election results day performed for the next five years. They considered the data for five Union Elections held between 1999 and 2019.

Table: Performance of an Sip Started on Election Results Day Over Five Years*

The above table shows how, on 10 out of 12 occasions, when the Nifty had a big single-day fall, the returns ranged between 24% to 94% after one year. These are excellent returns. Only on two occasions, the returns were negative. This signifies an important aspect of investing behaviour. A fall in the market often triggers panic of selling, which results in investors withdrawing their funds at a loss.

However, those who demonstrate an investment behaviour that is guided by a strong investing process, are the ones who derive maximum benefit from a situation like this. In the long-term investing journey of maybe 15 years, an investor can potentially see a minimum of 3 election cycles, a few global events, and some economic swings that could result in volatility. But this should not deter him from the path of his investing goals. In fact, by staying disciplined and goal-focused, market volatility can be used to your advantage. 

Should You Buy the DIP?

Union Elections are a regular phenomenon, once every five years. If the Government is not able to complete the entire five-year term, for whatever reason, elections may happen even before five years. So, during your long-term investing journey, you will come across multiple elections. Whenever the election results are announced, there will be heightened volatility before, during, and after the event.

If the election outcome is not as expected, the markets may fall sharply in the short term. However, as the past data shows, with time, the markets will accept the results, make a bottom, recover the losses, and eventually, go on to make new highs.

So, you should continue with your SIPs as it is, before, during, and after elections. If the results are contrary to market expectations and if there is a dip, you may use it as an opportunity to deploy some additional money. 

Apart from election results, from time to time, the market may see sharp falls due to other events. As the past data shows, over a period of time, markets will find a bottom, start the recovery process, recoup the losses, and scale new highs.

In a growing economy like India, where markets are expected to do well in the long run, any sharp dips or corrections may be used as acceleration opportunities for your investments.

Buying the DIP and Stay the Course

One of Warren Buffett's famous quotes is: "Be fearful when others are greedy, and be greedy when others are fearful." When markets experience big falls, either a single day or over a short period, that is when most people are most fearful. If you can stay focused on the purpose of your investments, and stay the course despite any adverse market movement, the market will reward you handsomely in the longer term.