Elections are like World Cup T20 matches. The atmosphere is all-encompassing; you cannot look at your cell phone or the television without being bombarded by some message or the other. Similarly, you cannot escape the analysis and predictions either. From train friends to office colleagues, everyone has an opinion. Sooner or later, all of this begins to affect investment strategy, depending on your attitude towards such events.
Many investors tend to respond in a manner exemplified by Indian batsmen against genuine fast paced bowling - swinging wildly with eyes closed praying for the ball to connect and zoom on till the boundary line. The other, more likely alternative - being clean bowled or caught behind in the slips is studiously ignored until the umpire signals 'out.' Here are some of the survival strategies recommended by our experts.
Rakesh Tarway, VP and Head of Equity and Derivative Products Strategy, Motilal Oswal Securities, points out that markets witnessed a downward move of more than 10% immediately after Lok Sabha Election results of 1999 and 2004 whereas 2009 results brought an upward movement of more than 10%. FIIs have pumped in more than 4 billion dollars in Indian equities during February and March 2014. Retail investors should take into account that FIIs are better equipped to deal with volatility and they also take a global asset allocation call to deploy money in any market. Results of elections in India largely remain very unpredictable and therefore it is not a prudent strategy for retail investors to put all bets in equity markets keeping in mind results of elections. Retail investors, instead, should stick to their long term asset allocation plan regardless of events.
Rush of liquidity also leads to considerable rise in stock prices of bad quality companies. There also is an increase in the number of so called "hot tips" by market experts. As far as equity investing is concerned sticking to basics and focusing on the quality of company offers a better avenue for returns in long term rather than timing any event. Those retail investors who can spare time should allocate time to study company and its future prospects before investing money. Retail investors should prefer companies which, offer good cash flow, high return on capital, unleveraged balance sheet and reasonable dividend payout, Rakesh advises.
Those who are unable to spend time to study individual companies should prefer a diversified mutual fund to take exposure in equity markets. Investing in a diversified mutual fund as well as investing in individual company suit well to the investors who prefer active investing. Active investing is costly from the point of investment management as well as risk. Index investing in a passive manner is an effective tool, which offers exposure to equity markets at a low cost. Nifty has given returns of ~13.5% per year for the last 10 years despite all the volatility it has endured during this period. There are various index funds, which track nifty and returns mirror those of nifty, Rakesh emphasises.
Manish Shah, Co-founder & CEO, Bigdecisions.in, affirms that while elections will present a great opportunity for traders and some investors on account of volatility in stock prices and eventual lowering of interest rates, for the middle class consumer saving for long term goals, it ought to make little or no difference. And while initial market reactions might cause a flurry of activity in the markets, these are likely to be smoothened out over the longer term.
B. Krishnakumar, Head – Equity Research, FundsIndia.com, underlines that general elections have been a key event from a stock market perspective. The Sensex and the Nifty are ruling at life-time highs and we expect the uptrend to continue. For investors, it is crucial to realize that any effort to time the market would be an arduous task, unless one is fully committed to stock market tracking / investment.
Over the past ten years, the Sensex has gained close to 278% from January1, 2004 level of 5,915.47 to the current levels of 22,343. Out of this gain of about 16428 points gained over a 10-year period, the top 10 gaining days accounted for 10,041 points or 61% of the total gains. This not only highlights the importance of being invested in the market at all times but also emphasizes the need to adopt a systematic investment plan. It is practically difficult to say with certainty when and what factors would drive the stock market into a euphoric phase. And, there will be limited scope for super-normal returns unless this euphoric phase happens.
Hence, B. Krishnakumar underlines that investors must have a basic understanding of underlying economic fundamentals and refrain from trying to time the market. Time spent at the market is more crucial to ensure that they don't miss out on those days that deliver abnormal returns. Unless you have adequate time, patience and expertise to track stock market developments and their implications, it would make sense to adopt a systematic investment plan or SIP kind of approach in either the index fund or index ETFs.